Summary  687
Just as critical, the notion that markets reward companies with higher 
share prices when they consistently beat the earnings consensus turns out to 
be wrong. Here again, while some researchers have found this to be true, their 
analysis doesn’t take into consideration the underlying performance of com-
panies as measured by revenue growth and return on capital.19 Once adjusted 
for performance, the apparent effect of beating the consensus consistently 
(which we define as four or more years out of seven) disappears. Compa-
nies with strong growth or ROIC had high shareholder returns regardless of 
whether they consistently beat the consensus. Only the companies that missed 
it consistently—again, in four years out of seven—showed a statistically sig-
nificant negative effect from doing so (see Exhibit 34.6).
Summary
The issues surrounding investor communications will remain unresolved 
for some time. Traditionally, there have been two camps: those who believe 
you can talk up your share price and those who believe companies shouldn’t 
19 See, for example, R. Kasznik and M. McNichols, “Does Meeting Earnings Expectations Matter? Evi-
dence from Analyst Forecast Revisions and Share Prices,” Journal of Accounting Research 40, no. 3 (June 
2002): 727–759.
EXHIBIT 34.6  Fundamentals vs. Consensus Estimates
High growth +
high ROIC3
High growth +
low ROIC3
Low growth +
high ROIC3
Consistently missing2
Inconsistent2
Consistently beating2
Low growth +
low ROIC3
4
3
0
2
0
0
0
–5
–5
–2
–3
–6
Median excess return vs. sector return,1 2005–2011, %
1 Company’s total shareholder returns (TSR) minus median TSR of the sector. Sample size is 243 nonfinancial S&P 500 companies with December fiscal year-end.
2 Difference between actual earnings per share and consensus estimate 30 days prior to earnings announcement. “Consistently beating” defined as beating 
expectations by >2% at least 4 out of 7 years, 2005–2011. “Consistently missing” defined as missing expectations by >2% at least 4 out of 7 years. Companies 
consistently meeting expectations (by +/– 2% at least 4 out of 7 years) are not shown due to small sample size.
3 ROIC = return on invested capital (2005–2011); growth = compound annual growth rate of revenue (2004–2011). Companies categorized as high ROIC or high growth 
exceeded the absolute reference points of 15% for ROIC and 7% for growth or the median of the respective sector in the sample.
Source: Standard & Poor’s Capital IQ.

688  Investor Communications
spend much time or effort on investor communications at all, because it won’t 
make any difference to their market value. Our view is, first, that investors 
can more accurately value a company if they have the right information and, 
second, that a market value aligned with the true value of your company is 
the best outcome of your investor communications strategy. Moreover, even if 
you do manage to talk up the stock in the short term, this is unlikely to be the 
best thing for the company in the long run.
You can better align your company’s stock market value with its intrinsic 
value by applying some of the systematic approaches described in this chapter 
for identifying value, understanding your current and potential investors, and 
communicating with the sophisticated investors who ultimately drive a com-
pany’s share price. These principles also can help managers use their scarce 
time for investor communications more efficiently and effectively.
Moreover, rather than providing precise earnings guidance or taking ac-
tions to achieve consensus earnings forecasts, managers should focus on driv-
ing return on invested capital (ROIC) and growth to create maximum value 
for shareholders. Managers should not be distracted from their efforts to drive 
ROIC and growth by any short-term price volatility—that is, any temporary 
deviation in their share price from its intrinsic value—because such deviations 
are likely to occur from time to time, even in the most efficient stock market.

Part Five
Special Situations