Companies Waste Huge Amounts Of Time Trying To Beat Wall Street's Estimates

Especially for large and popular companies like Amazon, Google, and Apple, quarterly earnings announcements become a circus of attention, with competing price targets, analyst estimates, and minute-by-minute analysis of earnings calls.

According to a new report in the McKinsey Quarterly, we're paying entirely too much attention to these numbers. Meeting or missing consensus numbers doesn't have anywhere near the effect on performance or share price that we would expect from the frenzy.

Shares often move in the opposite direction of a miss or beat, the bumps either way don't last very long, and the effect relative to long-term performance is minimal.

Even consistently beating estimates doesn't end up mattering. The only thing that really changes things is constantly missing over a number of years, which is a sign of a company in poor health. Here's McKinsey 's chart breaking down how fundamental growth outweighs earnings beats or misses:

Despite that evidence, companies still jump through hoops to beat estimates, Tim Koller, Rishi Raj, and Abhishek Saxena write:

Executives often go to some lengths to meet or beat consensus estimates — even acting in ways that could damage the longer-term health of the business. It’s not uncommon, for example, for companies to offer customers steep discounts in the final days of a reporting period in order to stoke sales numbers, in effect borrowing from the next quarter’s sales. As other companies have shown, executives may forgo value-creating investments in favor of short-term results, or they might manage earnings inappropriately to create the illusion of stability.

Extraordinary efforts to beat earnings are a waste of time and effort around an event given outsize importance by the financial sector and media. The reasons to do it are either cosmetic, or tied to the kind of short-term incentives that are bad for companies anyway.

Companies shouldn't do something potentially harmful for cosmetic reasons. In order to change culture and practices around earnings time, there has to be a clear and consistent message to managers to make sure they change their behavior, and to external stakeholders, so they know what to expect.

Amazon and its CEO Jeff Bezos have managed to train the market to frequently ignore its beats or misses. It's something more companies should focus on in the future.

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