I was recently on a call regarding a financing. It was late in the quarter, and a discussion of current operating results relative to expectations was almost an afterthought. This brought to mind the importance of a company delivering on expectations in the first quarter or two immediately following a financing. In the public market, this is absolutely critical to establishing or maintaining credibility with the investing public. In the private market, it is important to build trust and confidence with investing partners.

A few examples come to mind of companies that disappointed investors shortly after raising public equity capital, and the resulting impact on their stock prices and images. I was involved in most of Cracker Barrel Old Country Store Inc.’s early financings. Its second or third follow-on offering was completed in the mid-1980s toward the end of the company’s first fiscal quarter. A few weeks later and only a few days before the quarter ended, the company presented at an investor conference my firm sponsored. During their presentation, Cracker Barrel’s management announced that earnings would be below the expectations that were laid out during the road show just a few weeks earlier – clearly a surprise to all.

The reaction of the audience was something I will never forget. There was an audible gasp, and a number of investors jumped up from their seats, hurriedly making their way out of the room to get to a pay phone (this was before cell phones and the Internet) to call their trading desks to sell the stock.

Needless to say, Cracker Barrel’s stock came under considerable pressure and sold off significantly. More importantly, the company’s credibility with investors was hurt, and a new chief financial officer had to be brought on to restore it. The stock, as I recall, stayed below the price of the follow-on offering for upward of a year and a half.

A legitimate question is whether or not the company could have raised capital if investors knew that earnings would be disappointing. If not, the company’s growth trajectory may have been quite different. The damage to management’s image and the long time the stock remained under pressure delayed the company’s next equity offering, however. The volatility in the stock and the reputational damage took a toll on investors and management alike.

A second example is O’Charley’s Inc., a company that was acquired a few years ago and is no longer public. I was involved in its public offering in July 1990, just before the first Iraq war. The invasion of Iraq had a short-term impact on the economy and on O’Charley’s operating results. As a consequence, the company reported disappointing earnings for its first quarter as a public company. The stock’s recovery was slow, and it remained below the IPO price for well over a year. Throughout its time as a public company, O’Charley’s never attained the kind of valuations accorded other casual-dining chains, even though many of its financial metrics were comparable or better. I believe that its inauspicious public debut forever tainted the company, even though much of the disappointment was beyond management’s control.

How do you think the first quarter of earnings following a financing impacts overall success? Join the conversation in the comments below.

A more recent example of a surprise for investors is Ignite Restaurant Group Inc.’s restatement of earnings two months after its IPO. After trading to a nearly 40-percent premium to the IPO price in its first few weeks as a public company, the stock immediately fell to the offering price on the announcement, ultimately drifting down even further. It was nearly a year before the stock recovered to its old high. The lasting impact of the restatement is difficult to determine because the company made a major acquisition, Romano’s Macaroni Grill, which significantly changed the composition of the company’s operations. It is interesting to note, however, that, similar to the situation with Cracker Barrel nearly 30 years previously, Ignite hired a new CFO within the first year after the surprise announcement.

The lesson to take away from these examples is obvious: Negative surprises have a significant negative impact on stock performance. Based on Cracker Barrel’s experience relative to that of O’Charley’s, the impact on management’s credibility with investors can be overcome if the company is already public. This is probably because investors’ opinions of the management of a company that has been public for a while are already formed. A surprise immediately following an IPO hits during the time that investors are formulating their opinions of management. As a result, it becomes part of the foundation of their opinions, which makes them more difficult to change.

The advice for management is equally obvious: Be 100 percent confident in earnings expectations, at least for the first period to be reported after raising capital. The potential damage to management’s reputation and credibility to shareholders from missteps in that arena, in my opinion, far outweighs any potential cost resulting from the issuance of stock at a lower price.