By revealing bad news early, managements can insulate themselves from lawsuits by investors who bought shares between the time company officials first got wind of punk earnings and the time the figures were formally released. After a preannouncement, analysts usually revise their estimates. This is a second, normally higher, estimate of profits that is rumored to represent what an analyst really thinks a company will earn in a given quarter. Whisper numbers are controversial. Companies sometimes meet earnings expectations only to see their stock price fall because profits trailed the whispers.
Many observers question the ethics of the practice.
Moreover, no one is held accountable, at least in public, for whispered forecasts. The cockroach theory holds that just as you rarely find one roach in the cupboard, you will rarely find a single earnings surprise, good or bad. Behind the theory is the idea that an earnings surprise can often signal a change in the long-term outlook for future earnings. Many investors say they're inclined to sell the stocks of companies that surprise by failing to meet estimates. Watch for estimate revisions.