A majority of the companies across the world provide earnings guidance. It's in the form of a target number that the company projects it will reach in terms of revenue, profit, growth etc. It is provided by companies because providing guidance increases liquidity for companies that might otherwise be ignored, and liquidity helps to reduce volatility. Also companies like to tell their stories themselves rather then letting analysts speculate. Another reason is earnings are a key part of corporate performance. Such information is important for the market to know.
And yet, the evidence continues to build that the theory of earnings guidance is all wrong. There are many who look at guidance in a negative light. They contest that it imbeds perverse incentives (to manage the numbers rather than the business), relies on dubious assumptions (that earnings should be stable), and feeds into a short-term mentality. The stock market existed for centuries before guidance became common practice in the early 1990s, so it can certainly function without it. Also research by McKinsey actually suggests that for large companies earnings forecasts actually increase volatility because the fact of hitting or missing creates trading action.
Earnings guidance is not knowledge. It is just an educated guess, or rather, an aspirational one that far too many companies will fold, spindle or mutilate themselves to meet. Take the example of Enron for the worst-case scenario of guidance gone amok. Companies like the New York stock Exchange (NYSE), Berkshire Hathaway, Google, and JP Morgan Chase do not provide a earnings guidance. Good economic performance is a process, not a number. All these companies provide other details to the market like medium-to long-term goals for each of its businesses, return on equity, company's priorities, strategy, issues and finances. Even the Chinese Communist Party gets this concept. Like Warren Buffett and the gang at Google, China has come to recognize good management requires that numbers be servants, not masters. Their newest five year plan does not feature an economic growth target.
Companies ought to re-look at the need to provide earnings guidance and see if other parameters can be provided instead.
And yet, the evidence continues to build that the theory of earnings guidance is all wrong. There are many who look at guidance in a negative light. They contest that it imbeds perverse incentives (to manage the numbers rather than the business), relies on dubious assumptions (that earnings should be stable), and feeds into a short-term mentality. The stock market existed for centuries before guidance became common practice in the early 1990s, so it can certainly function without it. Also research by McKinsey actually suggests that for large companies earnings forecasts actually increase volatility because the fact of hitting or missing creates trading action.
Earnings guidance is not knowledge. It is just an educated guess, or rather, an aspirational one that far too many companies will fold, spindle or mutilate themselves to meet. Take the example of Enron for the worst-case scenario of guidance gone amok. Companies like the New York stock Exchange (NYSE), Berkshire Hathaway, Google, and JP Morgan Chase do not provide a earnings guidance. Good economic performance is a process, not a number. All these companies provide other details to the market like medium-to long-term goals for each of its businesses, return on equity, company's priorities, strategy, issues and finances. Even the Chinese Communist Party gets this concept. Like Warren Buffett and the gang at Google, China has come to recognize good management requires that numbers be servants, not masters. Their newest five year plan does not feature an economic growth target.
Companies ought to re-look at the need to provide earnings guidance and see if other parameters can be provided instead.
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