instance,onApril10,1997,Intelreportedearningsof$2.10
pershare, higherthananalystestimatesof$2.06pershare,
butsawitsstockpricedrop 5 points,becausethewhispered
earningsestimate hadbeen $2.15.In otherwords, markets
had builtinto expectationsthe amountby which Intelhad
beaten earnings estimates historically.
Why Do Firms Manage Earnings?
Firmsgenerallymanage earningsbecausethey believethat
theywillberewardedbymarketsfordeliveringearningsthat
are smoother and come in consistently above analyst
estimates.Asevidence,theypointtothesuccessofMicrosoft
andIntelandthebrutalpunishmentmetedout,especiallyat
technology firms, for firms that do not meet expectations.
Manyfinancialmanagersalsoseemtobelievethatinvestors
takeearningsnumbers atfacevalueandworkatdelivering
bottomlinesthatreflectthisbelief.Thismayexplainwhyany
attempts by the Financial Accounting Standards Board
(FASB)tochangethewayearningsaremeasuredarefought
withvigor,evenwhenthechangesmakesense.Forinstance,
attemptsbyFASBtovaluetheoptionsgrantedbythesefirms
to their managers ata fair value and charge them against
earningsorchangethewaymergersareaccountedforhave
been consistently opposed by technology firms.
Itmayalsobeinthebestinterestsofthemanagersoffirmsto
manageearnings.Managersknowthattheyaremorelikelyto
be fired when earnings drop significantly relative to prior
periods. Furthermore, there are firms where managerial
compensationisstillbuiltaroundprofittargets,andmeeting
these targets can lead to lucrative bonuses.