A corporation’s earnings report can have a devastating effect on its stock price if earnings just barely fail to meet the company’s projections. If a company misses its earnings estimates by only a penny a share, investors may hammer its stock, thinking that the company would have used every accounting trick in the book to meet the projections. Therefore, the reasoning goes, missing projections by a penny a share must mean trouble’s a-brewing. Such pressure from Wall Street can force companies to do anything to meet short-term earnings targets, possibly at the expense of longer-term growth. In one survey of more than 400 financial executives, about 80% of the respondents said that they would cut discretionary spending on things like research, development and hiring in order to rein in costs, meet projections and satisfy Wall Street’s demands for hitting quarterly earnings targets.
Some have suggested that companies should stop putting out estimates of quarterly earnings and perhaps instead provide more meaningful communication for investors to understand longer-term business strategies