The myth of smooth earnings

Many executives strive for stable earnings growth, but research shows that investors don't worry about variability.

Executives like their earnings smooth - even in normal times, they will go to great lengths to achieve steady growth in earnings per share quarter after quarter. As the economy emerges slowly from recession, we encounter even more deference to the conventional wisdom that investors prefer smooth earnings growth and shun earnings volatility. Those who make such claims have long cited stable earnings growth as a rationale for strategic actions. In 2002, for example, the CEO of Conoco justified that company's then pending merger with Phillips Petroleum in part by asserting that the deal would provide greater earnings stability throughout the commodity price cycle.

Our research shows that these efforts aren't worthwhile and may actually hurt companies pursuing them ... READ MORE

Released by McKinsey & Company - February 2011