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Streetwise: Not such great expectations

Many companies still play the game of regularly guiding market expectations for earnings to a level that they then proceed to beat. They should watch their language


Recent events have put companies on notice that practices that have been rubber-stamped by regulators for years might suddenly be declared illegal. They have also demonstrated that executives can't be too careful when drafting public communications: allegations are no longer based just on outright lies and omissions but also on words or phrases said to create a misleading impression. One recent example was the SEC's investigation of American International Group, in which the SEC and the US Justice Department found fault with several press releases.

To stay out of the crosshairs, companies have to examine everything they say and do through the eyes of ambitious prosecutors, questioning any practice that might be misunderstood by an unsophisticated investor.

One long-standing practice that might invite scrutiny is the management of investor expectations. The press and investors never cease to be impressed by companies that ?exceed Wall Street estimates?, so most companies try to do this. There are two ways to achieve this goal: either perform better than expected, or try to set expectations below the level at which you expect the company to perform.