Monday, January 29, 2007

Earnings Management

This chart has been making the econ blog rounds over the last few days:

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Since October 2002, the lowest percentage of companies to beat earnings expectations is 59%. That's a pretty remarkable number when you think about it. It seems like most companies are going to beat expectations.

But -- let's look at the other side of the coin. Companies are pretty sophisticated about marketing. After all, most of these companies have sales and marketing departments, some have advertising accounts with some of the biggest advertising firms around and most CEOs are pretty marketing savvy. Here's the point: Companies do their best to influence market perception. It would not be surprising at all to learn that company x deliberately downplayed future expectations in order to beat those expectations and therefore hopefully drive the stock price up.

Remember: all of this miraculous "beating of expectations" also involves players who are very savvy about selling.

Food for thought.