Most companies view the quarterly ritual of issuing earnings guidance as a necessary, if sometimes onerous, part of communicating with financial markets. The benefits, they hope, are lower share price volatility and higher valuations. At the least, companies expect frequent earnings guidance to boost their stock's liquidity.
We believe that they are misguided. Our analysis of the perceived benefits of issuing frequent earnings guidance found no evidence that it affects valuation multiples, improves shareholder returns, or reduces share price volatility. The only significant effect we observed is an increase in trading volumes when companies start issuing guidance—an effect that would interest short-term investors who trade on the news of such announcements but should be of little concern to most managers, except in companies with illiquid stocks. Our recent survey1 found, however, that providing quarterly guidance has real costs, chief among them the time senior management must spend preparing the reports and an excessive focus on short-term results.
These results pose an intriguing question: if issuing guidance doesn't affect valuations and share price volatility, why should a company incur the real costs of issuing it merely to satisfy requests from analysts?
See full Article.
Posts
