New research suggests that corporate managers are so afraid of the negative impact of reporting volatile earnings on stock prices that they forgo value-creating initiatives that could disrupt short-term earnings goals.

The research, titled ‘The Economic Implications of Corporate Financial Reporting’ was authored by John Graham and Campbell Harvey, both from Duke University, and the University of Washington’s Shiva Rajgopal.

They surveyed 401 financial executives, and conducted in-depth interviews with an additional 20, to determine the key factors that drive decisions related to reported earnings and voluntary disclosure. They conclude that most firms view earnings, especially earnings per share, as the key metric for outsiders, even more important than cash flows.

“Missing an earnings target or reporting volatile earnings is thought to reduce the predictability of earnings, which in turn reduces stock price because investors and analysts hate uncertainty,” they said.

“Because of the severe market reaction to missing an earnings target, we find that firms are willing to sacrifice economic value in order to meet a short-run earnings target,” they said. “The preference for smooth earnings is so strong that 78% of the surveyed executives would give up economic value in exchange for smooth earnings.”

In addition, 55% of managers would avoid initiating a project with a very positive net present value if it meant falling short of the current quarter’s consensus earnings.

They also found that managers make voluntary disclosures to reduce information risk associated with their stock, but try to avoid setting a disclosure precedent that will be difficult to maintain. Their research confirms that executives aim to manage earnings, and are motivated to make disclosures, with an eye on their stock price.