The Earnings Game

Abstract

The Earnings Game refers to the dance between corporate officers and the investment community in the evaluation and communications of corporate financial performance.Investors continually evaluate the prospects of businesses they own or wish to own. Earnings announcements provide critical data points in those evaluations because they reflect concrete figures provided by the companies themselves according to standards that reasonably enable comparisons of company performance to its past and peers.Knowing the importance of earnings data to the investment community causes corporate managers to be very cautious about its disclosure. Managers generally want to show growing earnings, and to minimize uncertainty about future earnings, and they manage their businesses and their reporting accordingly. Often, part of this management involves reacting to analyst earnings projections by affirming or confronting investor expectations. The investment community, naturally, understands management's motivation and must account for management credibility at the same time they evaluate company-provided information. Management, in turn, must nurture their credibility with the investment community with each release.The following case engages participants to understand the motivations and reactions of both sides of this dance. It places participants in various roles with certain incentives and constraints, and allows all participants to interact in a manner consistent with their respective motivations. While this case necessarily simplifies the relationship between corporate management and investment analysts, it evokes both the relevant behaviors and their emotional content in the management and evaluation of companies with respect to their earnings.