Goldman Sachs on Thursday told the world its profits fell 11 percent. Yet the bank’s stock rose on the news. It may sound odd, but it’s perfectly logical on Wall Street. The markets expected Goldman to do even worse, so when the news wasn’t as bad as predicted, the stock moved up.
Fine tuning market expectations is important for public companies. It’s a lot like a kid who blows a test. It’s better to tell mom and dad before the report card comes. If your parents are both accounting professors, they would call that giving guidance.
“If my daughter has a test that’s particularly difficult, we hear about it beforehand,” says James Myers.
He and his wife Linda Myers study these issues at University of Arkansas. They have two kids and are both quick to say both are good students. But if they ever hit a bump, they say it’s wise to dial down their expectations before the report card arrives.
Companies can do the same thing ahead of their own report cards, the quarterly earnings reports. Providing guidance about good or bad times at the company can help keep the stock price under control when the final news comes.
Or, another example, by way of Marketplace’s Paddy Hirsch and his Whiteboard:
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