Survey Finds Profit Pressure Is Leading to Poor Decisions
By ALEX BERENSON
Published: February 7, 2004
The pressure to meet short-term earnings targets is causing many publicly traded companies to make business decisions that could hurt them in the long run, according to a new survey from Duke University and the University of Washington.
Nearly two years after a wave of accounting scandals scarred investors and corporate America, the survey suggests that senior executives at public companies continue to feel intense pressure to meet earnings forecasts from Wall Street analysts.
The survey found that accounting gimmickry seems to have become less common but that many public companies will sacrifice spending on research and development or maintenance to meet quarterly earnings goals.
"It seems like this fixation on the consensus is causing value to be destroyed," said Campbell R. Harvey, the J. Paul Sticht professor of international business at the Fuqua School of Business at Duke University. "Earnings management is just so common everybody believes everybody does it."
Mr. Harvey said he was surprised that the executives were so open about their willingness to manage their businesses to meet Wall Street's expectations.
With investors closely scrutinizing companies' accounting for gimmicks, companies have grown reluctant to use aggressive accounting techniques, the survey found. Only about 10 percent of all the companies surveyed said they would alter their accounting assumptions to meet a quarterly target, and only about 20 percent said they would postpone making an accounting change to meet a target.
But many companies said they would be willing to sell assets, give their customers incentives to buy more products than they need or cut spending on maintenance or research and development.
More than half of the companies surveyed said they would delay starting a project to meet their earnings target, even if they knew the project would be profitable. About 80 percent said they would cut spending on research and development, advertising or maintenance that would not hurt them in the short run but could hurt them over time.
"We got the impression that they are extremely risk-averse when it comes to doing anything with accounting," Mr. Harvey said. "Yet they felt O.K. in doing things that sacrifice long-term value."
The survey covered 401 financial executives, who were questioned in late 2003 by e-mail or regular mail. An additional 20 executives agreed to be questioned in person or over the phone, Mr. Harvey said.
Posted by P6 at February 7, 2004 10:59 AM
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Comments
I wonder what Public Choice theory would have to say about this.
Perhaps there is some kind of legal or institutional cause to this, creating an environment in which such behavior is perfectly rational. This reminds me of that whole mutual fund 'scandal' a few months back. It turned out that it wasn't any kind of malfeasance on the part of the fund managers, but a set of regulations that made the 'scandalous' behavior a rational and inevitable outcome.
Posted by Brian at February 9, 2004 04:00 AM