Georgia State Study Shows Managers Are More Adept at Reporting Earnings That Meet or Slightly Beat Analysts' Estimates

FOR IMMEDIATE RELEASE
May 27, 1998

CONTACT:
Bruce D. Brooks
404/651-2645

Georgia State Study Shows Managers Are More Adept at Reporting Earnings That Meet or Slightly Beat Analysts' Estimates

ATLANTA -- Managers are far more likely to report profits that meet or slightly beat analysts' earnings estimates than they used to, according to a recent study by Dr. Lawrence Brown, Controllers RoundTable Research Professor in the College of Business Administration at Georgia State University.

"Although there has been recent media speculation that managers are reporting profits that meet or exceed analysts' expectations, there has been no hard evidence that supports this notion," Brown said.

In an analysis of I/B/E/S International Inc. data, Brown examined the-13 year time period from 1984 to 1996 and found that, when firms report profits, the frequency with which reported earnings exceed analysts' estimates by one cent, two cents or three cents has more than doubled. He also finds similar, but less dramatic results when reported profits exceed analysts' estimates by four to seven cents.

Brown's report also indicates that analysts' estimates, which used to be overly optimistic, have now become pessimistic in the case of profits. In terms of losses, analysts were optimistic over the entire time period, but became much less optimistic.

"Analysts have gotten much better at predicting losses," Brown said. "They used to predict that less than half of the reported losses would actually be losses. However, recently, also reduced their tendency to make extreme negative errors when firms report losses by more than two-thirds." (more)Georgia State Study, Page 2

Have analysts really gotten better at predicting earnings? Not according to Brown. The reasons for analysts and managers to be more in line in terms of reporting and estimating earnings are largely attributable to better communication.

"Managers have gotten better at communicating with analysts, managing earnings numbers and managing analysts' estimates," said Brown. "Managers try to report profits that meet or slightly beat analysts' estimates. If they believe that their soon-to-be reported profits cannot meet or slightly beat analysts' estimates, they try to get analysts to lower their estimates. If managers report a loss, they have no incentive to meet or slightly beat analysts' estimates. "Instead, they are likely to take the big bath, possibly causing analyst earnings forecast errors to be extreme and negative. However, in an effort to reduce extreme negative forecast errors and to maintain good relations with analysts, managers have gotten better at forewarning analysts that they are about to report losses and take big baths."

Brown's results have important implications for investors. "When analysts' earnings estimates were optimistic, stock prices would rise if reported profits just met or slightly beat analysts' estimates. Now that analysts' earnings estimates are pessimistic, stock prices will fall unless reported profits beat the consensus estimate by the expected amount of the earnings surprise."

Brown added that firms with a track record of reporting earnings that beat consensus estimates are vulnerable to having their stock prices take a beating the first time they report or preannounce profits that fail to meet or slightly exceed analysts' estimates.

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For more information, contact: Dr. Lawrence Brown, 404/651-0545 ([email protected])