Understand these players’ motivations-and this game’s perils-and you just might refuse to play. When the connection between stock price and a company’s intrinsic value dissolves, the earnings game can ruin companies and shareholders alike. Why the refusal? Selling would have boosted quarterly earnings beyond analysts’ expectations-imperiling the company’s ability to meet expectations next year.Īs players in this game increasingly view quarterly earnings as collective fiction, they also lose faith in the stock prices these numbers influence. An example: SmithKline Beecham’s venture-capital unit missed millions of dollars of profit when it refused to sell its hot biotech holdings. Yet this number dominates-and distorts-executives’, analysts’, investors’, and auditors’ decisions. Quarterly-earnings reports say little about a company’s financial health. What made Cisco System’s stock value plunge 13 % overnight? A one-cent difference between reported and expected quarterly earnings.
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