REPORTING FOR DUTY
March 6, 2007
Evidence is mounting that giving what's called quarterly guidance (for example, "next quarter the company is expected to earn $2.42 to $2.44 per share") is detrimental to a company's long-term performance, says Robert C. Pozen in the New York Times.
- A survey by the National Bureau of Economic Research found that 80 percent of senior financial executives were willing to forgo spending on research and development to meet their predictions.
- Some 55 percent were willing to delay projects that promise gains in the long term for their company.
- An empirical analysis of companies that regularly provide such guidance concluded that even though they are more likely to meet their projections than those that use the practice only occasionally, they are less likely to achieve long-term earnings growth.
Further, a 2006 McKinsey study showed no statistically significant differences between guiders and non-guiders when it came to valuation multiples, stock price volatility and the number of analysts following the company.
Yet because most companies stop giving quarterly guidance because they missed their own projections, the stock market tends to view a company's decision to stop as a negative signal about its future performance, says Pozen. That signal would be eliminated if more American companies announced a permanent end to the practice.
Instead, companies should provide more information to the public in three key areas, says Pozen:
- Disclosing more on long-term plans for acquisitions or divestitures, capital expenditures and research investments.
- After disclosing actual earnings per share for the quarter, companies should meet with Wall Street analysts to explain any mistaken assumptions or facts by analysts -- and post the explanations on the company Web site.
- Between quarterly disclosures of actual earnings, companies should publicly report -- using the Securities and Exchange Commission's expanded Form 8-K -- any material changes in the company's situation.
Source: Robert C. Pozen, "Reporting for Duty," New York Times, March 3, 2007.
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