February 13, 2010
The Market is Efficient, Except When It's Not
The Wall Street Journal has a report today about a study by Professor Joseph Grundfest and doctoral candidate Nadya Malenko, which concludes many companies manipulate earnings to meet or exceed quarterly expectations by, perhaps legally (but certainly suspiciously), rounding up their numbers more frequently than not (and significantly more frequently than one would predict). As Somnath Das, an accounting professor at the University of Illinois at Chicago, points out in the article, this really shouldn't surprise anyone--given the incentives managers have to exceed expectations, all the judgment calls required/allowed under the accounting rules, and the often relatively small amounts that can move results from four tenths to five tenths of a cent per share. And yet, as the article also points out, the market routinely moves in dramatic fashion in response to quarterly earning reports that exceed or miss projections by one cent per share.