Tuesday, November 27, 2007

Marking up on earnings guidance

In the US, increasingly companies are doing away with earnings guidance. The volatile times for business, a crashing dollar, market uncertainties, growing competition makes it increasingly difficult for CEOs to come up with reliable earnings forecasts.

The difficulty of predicting earnings accurately, for example, can lead to the often painful result of missing quarterly forecasts. That, in turn, can be a powerful incentive for management to focus excessive attention on the short term; to sacrifice longer-term, value-creating investments in favor of short-term results; and, in some cases, to manage earnings inappropriately from quarter to quarter to create the illusion of stability.

Instead of providing frequent earnings guidance, companies can help the market to understand their business, the underlying value drivers, the expected business climate, and their strategy—in short, to understand their long-term health as well as their short-term performance. Analysts and investors would then be better equipped to forecast the financial performance of these companies and to reach conclusions about their value.

Do you think the benefits of earnings guidance justify devoting precious management attention…?

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