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PPT : Long Term Investing in a Short Term World
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“Earnings are in a class by themselves”
Four reasons:
o Investors need a simple metric to summarize performance
o EPS gets the broadest media distribution and coverage
o Focus on EPS makes the analyst’s job easier
o Analysts evaluate a firm’s progress based on making EPS
Source: John R. Graham, Campbell R. Harvey, and Shiva Rajgopal, “The Economic Implications of Corporate Financial Reporting,” NBER Working Paper, March 2004.
Long Term Investing in a Short Term World
* Firms are willing to sacrifice economic value in order to meet a short-run earnings target
* The preference for smooth earnings is so strong that 78% of surveyed executives would give up economic value in exchange for smooth earnings!
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Tags: corporate financial reporting, economic implications, economic value, term investing