Financial Case Study: Google Inc.
Google Inc.—Earnings Announcements and Information Environment
Teaching notes: This case considers how investors and financial analysts and business press writers use accounting information, particularly earnings. The case is designed to give students “hands on” experience with complementary sources of information about Google’s performance—the formal audited financial statements, an earnings press release, pro forma earnings disclosure, and comparative stock charts. Google is a prime example of how good news is in the eye of the beholder! In Q4 2007, Google announced continued revenue growth and strong earnings. The press release was upbeat and optimistic. Yet, the stock plunged the following day. Evaluating how the business press interprets a firm’s performance can help build students’ confidence in their own ability to evaluate and interpret financial statements. The case begins with Google’s audited financial statements which, as is typical, were released well after the end of the fiscal year. This raises the issue that investors get “advance” information about earnings – from manager guidance to analyst’s forecasts to formal earnings press releases. Instructors can emphasize that although the audited statements are not the most timely source of information, they play a key “confirmatory” role because they are more credible than manager and analyst information. We use this as an opportunity to discuss the various manager and analyst incentives that may influence the accuracy or “bias” in the information they report. While the case does not explicitly require it, instructors may encourage students to access and review sample analyst reports for Google to highlight the important third-party intermediary role that analysts play in interpreting the firm’s performance and prospects and the abundance of information they provide to investors. Several questions about the recent patterns in Google’s revenues and expenses lead students to conclude that the company
Teaching notes: This case considers how investors and financial analysts and business press writers use accounting information, particularly earnings. The case is designed to give students “hands on” experience with complementary sources of information about Google’s performance—the formal audited financial statements, an earnings press release, pro forma earnings disclosure, and comparative stock charts. Google is a prime example of how good news is in the eye of the beholder! In Q4 2007, Google announced continued revenue growth and strong earnings. The press release was upbeat and optimistic. Yet, the stock plunged the following day. Evaluating how the business press interprets a firm’s performance can help build students’ confidence in their own ability to evaluate and interpret financial statements. The case begins with Google’s audited financial statements which, as is typical, were released well after the end of the fiscal year. This raises the issue that investors get “advance” information about earnings – from manager guidance to analyst’s forecasts to formal earnings press releases. Instructors can emphasize that although the audited statements are not the most timely source of information, they play a key “confirmatory” role because they are more credible than manager and analyst information. We use this as an opportunity to discuss the various manager and analyst incentives that may influence the accuracy or “bias” in the information they report. While the case does not explicitly require it, instructors may encourage students to access and review sample analyst reports for Google to highlight the important third-party intermediary role that analysts play in interpreting the firm’s performance and prospects and the abundance of information they provide to investors. Several questions about the recent patterns in Google’s revenues and expenses lead students to conclude that the company