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How to Win Investors Over

By Baruch Lev, Philip Bardes Professor of Accounting and Finance & Director of the Vincent C. Ross Institute of Accounting Research

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... research by me and other academics indicates that guidance increases analyst following and cuts down on unwelcome surprises, which in turn reduces stock price volatility and lessens the threat and consequences of shareholder lawsuits.

Providing earnings guidance—publicly releasing managerial forecasts of a company’s profits—is controversial. Warren Buffett has been a frequent critic. The Business Roundtable and the CFA Institute (the financial analysts’ trade group) have jointly concluded that it’s an unproductive and wasteful exercise that leaves executives too focused on short-term results. A team of McKinsey consultants has determined that guidance is misguided. The U.S. Chamber of Commerce is against it, too.

Yet more than a thousand publicly traded corporations in the United States, including many of the biggest, issue such forecasts every year, if not every quarter. What to make of this contradiction? To cut to the chase: The guidance givers are for the most part right, their do-gooder critics mainly wrong. Earnings guidance doesn’t work miracles, but research by me and other academics indicates that guidance increases analyst following and cuts down on unwelcome surprises, which in turn reduces stock price volatility and lessens the threat and consequences of shareholder lawsuits. No mean feat.

Read full article as published in Harvard Business Review.

This article is adapted from Professor Baruch Lev's book Winning Investors Over: Surprising Truths About Honesty, Earnings Guidance, and Other Ways to Boost Your Stock Price (Harvard Business Review Press, 2011).