The Quarterly Earnings Myth

Today, Moody’s came out with a report that questions the idea that taking a firm private helps the company because it frees it from quarterly earnings reports.
CNBC just had a segment on the report and they featured the standard debate of a labor guy against a free market think tank guy, but I think this misses the point of the report. Moody’s wasn’t questioning the efficiency of buyouts, but the idea that quarterly earnings reports stifle companies.
I haven’t seen the report, but I’m not surprised by the findings. The myth of the quarterly earnings ogre is vastly overrated. This is one of those make-believe issues that sweep over Wall Street every few years. Some folks even want to ditch them. My feeling is that if companies find themselves held hostage to quarterly forecasts, then at some level, it’s their fault.
It’s very easy for management to downplay the importance of earnings reports. The trouble comes when they consistently play them up, then suddenly face a bad quarter. Here’s a Business Week article describing how several years ago, employees at Cisco loaded up boxes on trucks before midnight to boost their earnings. They failed and the stock missed by a penny a share. The stock fell 13%. So who’s at fault? Unlike many investment writers, I have no problem blaming the investing public. But I’ll also fault management for relying so heavily on earnings reports before.
The idea that a buyout liberates management is just silly. Also, management still has to answer to their new owners. Does anyone believe that the private equity folks are more patient than the investing public?

Posted by on July 9th, 2007 at 11:44 am


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