earningsin 39 ofthe 40 quartersduringthedecadeandIntel
postedarecordalmostasimpressive.Othertechnologyfirms
followedin theirfootstepsintryingtodeliverearningsthat
werehigherthananalystestimatesbyatleastafewpennies.
The evidence is overwhelming that the phenomenon is
spreading.Foran unprecedented 18 quartersina rowfrom
1996 to2000,morefirmsbeatconsensusearningsestimates
than missed them.
7 Inanotherindicationofthemanagementofearnings,the
gap betweentheearningsreportedby firmsto theInternal
RevenueServiceandtheearningsreportedtoequityinvestors
has been growing over the last decade.
Giventhattheseanalystestimatesareexpectations,whatdoes
this tell us? One possibility is that analysts consistently
underestimateearningsand neverlearnfromtheirmistakes.
While this is a possibility, it seems extremely unlikely to
persist over an entire decade. Theother possibility is that
technology firms have far more discretion in how they
measureandreportearningsandareusingthisdiscretionto
beat estimates. In particular, the treatment of research
expenses as operating expenses gives these firms an
advantage when it comes to managing earnings.
Doesmanagingearningsreallyincreaseafirm’sstockprice?
Itmightbepossibletobeatanalystsquarterafterquarter,but
are markets as gullible? They are not, and the advent of
so-called whispered earningsestimates isa reaction to the
consistentdelivery ofearningsthat areaboveexpectations.
What are whispered earnings? Whispered earnings are
implicitearningsestimatesthatfirmslikeIntelandMicrosoft
haveto beattosurprisethemarket,andtheseestimatesare
usually a few cents higher than analyst estimates. For