When I was working on my doctoral degree in accounting at Mississippi State University, I learned about the Big Bath. If you are an investor in individual stocks and have never heard about this notion, it may have explained some situations you have witnessed before with stocks you’ve held.

Go here to read about it at Investopedia.

In simple words, when a company is going to otherwise have a poor upcoming earnings report, it may go ahead and throw the kitchen sink of bad things into that earnings outcome. After all, investors will be disappointed anyway, so why not shove all the bad news into that quarter and get it behind you, the thinking goes. Then, going forward, the future can look all the better on a comparative basis. If you read the brief description linked above, you will note that the motive for the Big Bath has been shown to be one of manipulation of earnings to bring advantage to corporate management.

I’m not suggesting the practice is highly ethical, but it’s commonplace and worth knowing about, in my view.

Have a good next week, friends.