<p>Earnings announcements by companies are closely followed by, and frequently r
ID: 2674751 • Letter: #
Question
<p>Earnings announcements by companies are closely followed by, and frequently result in, share price revisions. This raises two issues. First, earnings announcements are “ history” – that is, they reflect information on a past period. If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant? Second, these announcements revolve around accounting earnings. Going back to Chapter 2, we learned that such earnings may have little to do with cash flow. So, again, why are earnings announcements relevant?</p>Explanation / Answer
The numbers of the past are important because investors can see trends in the profitability of the company. for instance if a company publishes these statements every quarter investors may be able to see that their profits tend to dip in the 4th quarter thus they may be able to acquire more of the shares after the 4th quarter at a lower price. It is true that the price of stock shares is generally based on future projections, but those future projections are almost always based on past trends both for the individual company and for the industry that the firm is in. The increase in accounting earnings is generally a result of an estimated escalation in stock price, so the number of stocks the company is holding or thinking about issuing will change in value. So again these statements allow current and potential investors to make decisions regarding investing in the firm.
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