Not so fast. Though it's common for investors to assume a company that beats earnings estimates is doing better than expected, that's often not the case. Earnings estimates aren't as objective as you might think. The problem with that, though, is that earnings estimates become what companies want them to be. There's a huge incentive for companies to drag analysts' initial estimates down.
Analysts often make optimistic earnings predictions at the beginning of the quarter.
Hayn, along with the other researchers, further found that companies manipulate earnings estimates so they can end the quarter on a high note. They cited Microsoft, Pepsico and Staples as primary examples. Don't just look at the end of the quarter to see whether the company beat expectations. Keep an eye out for downgrades of earnings expectations during the quarter. These might be leading indicators that the company is bullying analysts to reduce estimates so it will look better at the end of the quarter.