Study details ‘cheat season’ where companies attempt to exceed analysts' expectations

It won’t surprise any market-watcher to learn that in the run-up to earnings season, companies tend to lower the bar for top and bottom line performance, thereby giving themselves better odds of exceeding analysts’ expectations.

However, a new working paper suggests that the sins of omission that occur during the corporate “cheating” season, as it was dubbed by Societe Generale global head of quantitative strategy Andrew Lapthorne, are far more insidious.

Authors Kenneth Froot, Namho Kang, Gideon Ozik, and Ronnie Sadka conclude that managers mislead analysts and shareholders during earnings reports, and that their penchant for massaging expectations downwards may be employed in order to open up a window to buy their stock on the cheap in the near future.