The biggest one-day changes in any company's stock price seem to happen when they post quarterly results.

If the results beat expectations then the stock price will go up, and if they do not then the stock price basically goes down very very drastically.

Since all these analysts have put the expected EPS out there for everyone to see -- including a company's board of directors -- why doesn't the board

(a) release quarterly results that are expectation-friendly, or

(b) if they know they are going to miss the results, then tell analysts to revise their expectations so there are no huge surprises on the day of results?

  • 3
    The BofDir should lie about the quarter's results to make analysts' predictions look good? – DJohnM Feb 5 '15 at 19:36
  • How often are you expecting the board to keep on top of the financials of the company? Seriously as sales will fluctuate a bit and thus there could last day sales for the quarter that make things challenging here or do you not understand the full intention of your question here. – JB King Feb 5 '15 at 19:44
  • 2
    Companies very frequently do the second. They are called Profit Warnings – DJClayworth Feb 5 '15 at 21:39
  • There are the company's predictions going forward, the "street's" expectations, and the actual quarterly financial statement. Which two of these are you asking about? – DJohnM Feb 6 '15 at 1:04
up vote 4 down vote accepted

First off, some companies do something like this. Microsoft for example was well-known for consistently hitting earnings estimates every quarter - nearly never missed them, and most of the time didn't exceed by much either. In order to do this and not be prosecuted for accounting fraud, you typically have to be a service or nontangible good company (like Microsoft used to be) where you can manipulate the amount of product on hand and move costs fairly easily from one quarter to the next. A company like, say, Home Depot or Caterpillar - both of which have tangible goods they're either retailing or producing - has less flexibility there, although they will still try to move profits around to match earnings estimates more closely.

However, you have to be consistently doing well to be able to do this. You can't manufacture additional total revenue; so if you have one 'down' quarter, you have to either have moved some revenue into it from the previous quarter, or you have to be able to move some into it from the next quarter. That obviously doesn't work consistently unless you're a fast-growing company, or have an extremely stable base. It's also hard to do this in a legal-seeming fashion - technically this sort of manipulation is illegal, so decisions have to be justifiable.

Companies (like Microsoft) that are expanding can also do things to encourage slightly lower expectations. A company in need of a stock price bump issues press releases touting its inventions and products as amazing things that will drive profits through the roof and an aggressive profit forecast - just as easy to issue a press release with a conservative forecast, meaning the bar will be lower to hit.

It's also not really necessary to manipulate earnings to have a consistently well-performing stock. This article for example shows that companies who miss earnings estimates don't really suffer much (when controlling for their actual earnings changes, of course) in the long run. Your price might drop a bit, but if your company is otherwise sound, it will recover.

Finally, companies do sometimes come out with information ahead of earnings that cause expectations to be lowered. 7-Eleven for example just lowered its earnings expectations due to various reasons. Some companies choose to do this in order to dilute the effect on the market. I'm not sure if this is ever required, but it seems to me that some companies are much quicker to restate earnings expectations than others.

  • 1
    It is also worth mentioning that a lot of companies do this and do get prosecuted for accounting fraud years later! Consequences are largely minimal, the stock is higher and the CEO sales some shares to pay the government settlement, and the stock ends up higher on the day in the buying frenzy. – CQM Feb 5 '15 at 20:43
  • Some jurisdiction require companies to give profit warnings if they are not going to meet expectations. – DJClayworth Feb 5 '15 at 21:37
  • Did MS meet their published expectations, or the street's? – DJohnM Feb 6 '15 at 1:08

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.