The Case for Guidance
By Baruch Lev, Philip Bardes Professor of Accounting and Finance & Director of the Vincent C. Ross Institute of Accounting Research
Companies can benefit from giving advance notice about earnings. But they need to be smart about it.
A lot of prominent people don't like the idea of giving the market an early heads-up.
Critics, who include Warren Buffett, Al Gore and groups like the Chamber of Commerce, have blasted the practice of issuing ""guidance""—advance notices about earnings and other matters. They argue that it wastes managers' time and encourages short-term thinking, and may even drive companies to seek capital overseas instead of in the U.S.
But a host of research—mine and others'—shows that those arguments don't hold up. Guidance benefits investors, companies and managers in a number of ways, such as cutting down shareholder lawsuits and giving the market better data to work with. Indeed, research recently published in the Journal of Accounting and Economics documents a significant stock-price drop for companies that announced they were stopping guidance. Far from a waste of time, guidance is a crucial part of an executive's job.
That said, companies should do it smartly. For one thing, they should issue guidance only when they can predict performance better than analysts—and they should make it part of a broader practice of disclosure that gives investors insight into the company's plans and progress.
Read full article as published in The Wall Street Journal.