Final answer:
Companies manage income to meet or exceed analyst expectations, influencing investor confidence and stock prices. This strategy is driven by expectations of future profits, investor sentiment, and the company's strategy for growth and reinvestment.
Step-by-step explanation:
Companies have incentives to manage income to meet or beat Wall Street expectations so that they can attract more investors and sustain or increase their stock prices. This practice is fueled by the expectations of future profits, which is a crucial driver of investment benefits. A company that meets or exceeds analyst predictions typically sees increased investor confidence, which can lead to an influx of investment and higher stock valuations.
During periods of economic growth, businesses are generally more optimistic about the future, which leads to greater investments as they anticipate a growing market for their products. Conversely, in times of recession, such as in 2001 when U.S. investments fell from 21% of GDP to 18% of GDP, the opposite trend can be observed. Companies manage earnings not just for immediate financial benefits, but also to maintain a reputation for reliability and growth, which in turn affects investor sentiment and the ability to reinvest earnings for future expansion.