A federal rule bars companies from selectively disclosing material nonpublic information but doesn’t prohibit private conversations in which companies can gently push analysts in helpful directions, as AT&T did.

An analysis by The Wall Street Journal found that earnings estimates often decline steadily after the end of a quarter. That can turn what might have been an embarrassing “miss” for the company into a positive surprise.

The Journal examined daily changes in analysts’ estimates at S&P 500 companies since the start of 2013, comparing the estimates with what the companies ultimately reported for each period.

Nearly 2,000 times from the start of 2013 through this year’s first quarter, companies would have missed the average earnings estimate if analysts hadn’t changed their numbers in the 40 trading days before the company’s quarterly earnings report.

In about one-fourth of the instances where companies would have missed the average earnings estimate, the average projection fell enough that the company wound up meeting or beating analysts’ expectations instead, the Journal’s analysis shows. The 40 trading days cover the period from when companies typically have a good sense of the quarter’s performance to the day before earnings are announced.

Lowered earnings forecasts helped 66 companies, including Citigroup Inc., Coca-Cola Co. and Viacom Inc., each meet or exceed earnings expectations during at least three of 13 quarters examined by the Journal. CBS Corp., U.S. Bancorp and seven other companies met or beat reduced estimates in about half the quarters.

Eoin Treacy's view

One of the worst sins for an institutional analyst is to be wrong on one’s own. Abiding by the guidance supplied by companies is a sure way to ensure one’s view is in line with market expectations which removes the risk of getting the call horribly wrong. 

The flipside is regulators are always looking for abnormal behaviour. If an analyst does not abide by the guidance and says what they actually think, and are right too often, they are more likely to be investigated for insider dealing. Considering the career risk involved, the benefit of diverging from company earnings guidance is far outweighed by the profits to be gained from maintaining the status quo.    

Earnings surprises are very helpful to investor confidence and allow for a more bullish overall tone to commentary. For companies it makes their lives a little easier when investors are placated by surprisingly positive earnings. It’s important however that one note the bias of whomever makes a prognostication and equally desirable they understand themselves.