Based on some of the most thoughtful comments to any of these columns, one might conclude that acceptable earnings guidance by CEOs should take on new forms. Let's first consider the pros and cons, then some research, then some recommendations.
Sandi Edgar, citing her former employer's practice of providing detailed information about the company's "quarterly standings, stock prices, new acquisitions, etc.," concludes that "anyone who has stock or investments in a public company should be privileged to certain short-term information. . . . Taking away these privileges will drive investors away to other companies." Guillermo Estefani concurs, saying, "It is important to show all real information available from the company, so investors can track its behavior and learn whether it is really achieving its long-term targets."
Citing his experience, Terry Ott commented, "I worked in a private company that went public. . . . Post-IPO, the company has continued to do well but the morale has seriously declined because employees feel pressure to have the business look good on a quarterly basis." Lola Wilcox put it this way: " . . . vast amounts of internal energy go to 'making the quarter return' rather than serving the customer and building the future. Why did quarter returns develop in the first place?" Bill Hubbell added, "The market has many mechanisms to establish expectations. . . . There is no benefit in risking this exposure."
Shiva Rajgopal, who has investigated firms that stop giving guidance, shared some of his findings and those of his colleagues: " . . . firms that stop guiding have poor trailing earnings and stock return performance; they also have lower institutional ownership. We document an average -3.6 percent three-day return around the announcement to stop guidance. . . . After the elimination of guidance, stock prices lead earnings less, but there is no change in overall stock return volatility or analyst attention. After firms' decisions to stop giving guidance, analyst forecast dispersion increases and forecast accuracy decreases." For those wishing the full story, read "Is Silence Golden? An Empirical Analysis of Firms that Stop Giving Quarterly Earnings Guidance."
What is to be done? A number of suggestions were advanced. Gaurav Goel suggested that, "Providing conservative guidance to the market may ease pressure to squeeze the last cent out of your client's pocket or to push your employees to their limits." Gerald Nanninga wrote, " . . . the issue is what type of guidance one gives. If you give low near-term guidance, . . . the stock does not go up as quickly. . . . But it doesn't go back down as quickly later, either." Damon Leavell takes a different tack, recommending that, "Rather than speculate on earnings, . . . create unique indices based on (the) business that provide a guide to the health and well-being of the company and the industry." And Lorenzo Ferlazzo comments, "I would maybe run a slew of guidance measures in commentary . . . and suggest analysts use their own initiative to communicate their interpretation to the markets."
These comments raise more questions. Can comprehensive retrospective data compensate for projections? What is "real information"? And do conservative estimates of the future lead organizations to underperform? What do you think?