A main incentive for “cooking the books” is to put out solid numbers for your quarterly analyst call. This call is when analysts pour over (or act like they took the time to pour over) your financial statements and attempt to formulate a reasonable opinion on the financial health of your company.
But the thing is, while analysts may put a company in the hot seat over quarterly earnings, investors have a much longer-term view of a company. Sure, quarterly earnings may send stocks ticking up or ticking down, but the overall investor-perceived value of a stock comes from looking at the firm’s financial and reputational performance over the long term.
I don’t see individual investors having the time, knowledge or energy to make decisions based on what are (for the most part) pretty incomprehensible GAAP financial statements. And insistutional investors? I imagine they are too sophisticated to by drawn into a short-term view of a stock (I could be showing my naiveté here).
Either way, the fallacy of the numbers-by-the-quarter thinking is that investors, by and large, are short term thinkers.
James Surowiecki touches on this issue in far more elegant terms than I can muster.
Hat tip: Paul