Only this February, Barclays Bank announced preliminary results well below analysts' worst forecasts. The stock tumbled 6% and analysts knocked their current year forecasts back by about 7%. Someone, somewhere, had failed to manage the market's expectations of Barclays' results appropriately and the stock took the brunt.
Listed companies must avoid surprising the market, claims Tony Friend, a director of College Hill, an investor relations company. The market hates negative surprises, he says, but even good ones don't always enhance the reputation of the company's management. After all, management should be able to see ahead, make announcements to give the right indicators to the market and investors and provide guidance to analysts. It will then be seen as acting in an authoritative manner and will instil greater confidence in its abilities.
Earlier this year, grocery giant Safeway issued its second profits warning in three months. Initial market reaction was predictable - the value of the company's shares fell by over 2.5% - but as the Financial Times Lex column pointed out: 'At least Safeway is not in denial. That is the good news from an otherwise gloomy trading statement.' Profits warnings are one example where a clear statement should be issued explaining what the company is doing about it, adds Friend.
If share price does fall significantly due to poorly managed expectation, companies can find it difficult to get support for further fund raising, explains John Shaw, a director of corporate finance adviser Clifton Financial Associates. Ideally, companies should marginally exceed market expectations by between 3% and 5% but not by an excessive amount such as 20%, says Friend.
Shirley Whiting, director of Citigate's Leeds office, says the art of managing expectation is really about keeping investors, analysts and the market informed throughout the year. 'By the time results come out, analyst expectations should have been known in the market for a good six months,' she explains. The relationship between the investment community, analysts and media is therefore important, for example, and journalists should perhaps be steered away from the more bearish commentators.
Timing can also be important. If you want to minimise coverage, releasing bad results on a Friday may ensure that they are overlooked, says Ian James of Fleet Communications. Mondays are best for good results from smaller companies, while a Footsie company will get coverage whatever day the results are released.
Companies also need to ensure that they don't get confused with similarly named businesses, says Shaw. He points to four companies which suffered after a similarly named company had problems. Despite different products and markets, 'people just didn't know. They saw a name that looked the same and marked it down.'.