During the 1990s, General Electric put together a long string of consecutive quarters in which the firm managed to meet or beat the earnings forecast of Wall Street stock analysts. Some skeptics wondered if GE "managed" earnings to meet Wall Street's expectations. Skeptics were concerned that GE had used accounting gimmicks to "smooth" earnings --to conceal the true volatility in its business.
Questions:
1. How do you think GE's history of meeting or beating earnings forecasts affected its cost of capital?
2. If investors learn that GE's performance was achieved largely through accounting gimmicks, how do you think they would respond?
3. Let's assume you have $10,000 to invest in the stock market. Would you consider investing in the stock of a company that was rumored to have used accounting gimmicks to manage its earnings? Please explain.