Companies at Risk of an Earnings Miss Allow More Third-Party Trackers on Their Websites

Managing earnings at the cost of privacy

The corporate fear of delivering short-term disappointment to investors is so pervasive that plenty of firms on the bubble of an earnings miss — reporting a per-share profit figure below Wall Street expectations — pull out all sorts of accounting moves to avoid that fate.

Favorites have included stretching out the depreciation of equipment to reduce reported costs; juicing sales with incentives for purchases accelerated into the current quarter; adjusting when revenue from a long-term contract is booked. In recent years, impact beyond the income statement and balance has been unearthed by researchers, including firms facing an earnings miss scrimping on worker safety, committing wage theft and allowing higher levels of toxic emissions.

Such earnings management of short-term results often comes at the price of building long-term value. Other research has established that when you’re making decisions to avoid disappointing investors right now, you’re less inclined to make spending and investing decisions necessary for long-term growth.

UCLA Anderson’s Wen-Hsin Chang, a Ph.D. candidate, adds a new digital-age wrinkle to the deleterious impact of corporate earnings management. In a working paper, she documents that companies at risk of an annual earnings miss allow more third-party tracking of customers on their websites in a gambit to drive more visits and transactions.

While there is indeed more initial traffic from aggressive data-sharing tracking, the strategy can hurt consumers and businesses. 

Selling Out Privacy Comes at a Cost

Chang notes that consumers are often notified, yet they remain unaware of how extensively their data is shared and sold to third parties.That is, until it is so obvious it becomes annoying. The unsolicited email or text from a firm you never directly engaged with, or the same annoying ad following you wherever you are surfing are fed by third-party tracking. 

Past research has shown when customers become aware of aggressive tracking, their privacy concerns can dampen their willingness to buy the goods or services of the firm allowing the tracking.

Moreover, third-party trackers are a hotbed of data breaches. A 2022 report from Verizon found that nearly two-thirds of data breaches came from third-party tracking embedded on sites. A recent report from IBM puts the average cost of cleaning up a data breach (indirect and direct costs) at nearly $5 million.

“Intensified third-party online tracking offers a new and hidden way to nudge near-term consumer behavior to reach earnings benchmarks,” writes Chang. “Albeit at the expense of long-term consumers’ digital privacy.”

Allowing More Tracking Than One’s Peers

Chang studied online tracking behavior from 2018 through 2022. She melded the tracking behavior of publicly traded firms from the whotracks.me website, with each firm’s earnings recorded by Compustat. 

Chang calculated the amount of tracking a given firm engaged in, relative to its general industry and the focus of its website (business, news, e-commerce, entertainment, etc.). This enabled a more granular calculation of “abnormal” tracking behavior that deviated from the group average.

She then studied the behavior of firms that had managed to just barely beat their annual earnings target. Her observation? Firms that barely beat their earnings benchmark had embedded about 20% more trackers than the average for similar businesses. 

And it seems to work. The impact of personalized ads, and more targeted spending by firms based on the tracking data, increased site visits by an average of about 15% in the month following above-average usage of consumer tracking. 

That’s exactly the sugar high that firms sweating their upcoming earnings report crave. But it may also increase the potential for longer-term negative business outcomes.

Anecdotally, Chang recounts that Google ($5 billion) and Meta ($90 million) have settled lawsuits tied to aggressive tracking that plaintiffs said violated their privacy. Avast, an online firm that purported to protect users from online tracking, was fined $16.5 million by the Federal Trade Commission in 2024 for … wait for it … selling user data to more than 100 third parties through a subsidiary, without informing customers.

And then there’s the reputational hit. In the month following the 2018 revelation that Facebook had shared private user data with Cambridge Analytica without user consent, the site’s user engagement was down 20%. 

Yet when firms know that overstepping on privacy could be an existential threat, they are less likely to resort to more aggressive tracking to juice earnings. 

Chang documents that firms susceptible to an earnings miss that operate in industries where consumer privacy is a material risk were significantly less likely to engage in “abnormal” tracking. There was a similar restraint among firms with a board of directors committee overseeing consumer privacy. 

That suggests aggressive use of third-party tracking to manage earnings is an opportunistic — and potentially costly — choice.