Capital Markets

Opposition Builds to Earnings Guidance

House Committee on Financial Services plans hearings on guidance as ''part of a wider review into the clarity of corporate reporting.''
Stephen TaubMarch 13, 2006

Corporate America is turning bearish on earnings guidance.

The Financial Times reported that Pfizer is planning to move away from serving up earnings forecasts to Wall Street’s analysts and portfolio managers, joining a small but select group that already includes Citigroup, Intel, Motorola, Ford, and General Motors.

The newspaper also pointed out that the House Committee on Financial Services is planning to conduct hearings on the dangers of guidance. “This is part of a wider review into the clarity of corporate reporting under consideration by the committee,” deputy staff director Peggy Peterson told the FT. What’s more, investment banking giant Merrill Lynch is urging its analysts to downplay the significance of company guidance when its analysts calculate their earnings forecasts.

“It’s all part of a growing trend,” said David Chavern, chief of staff at the U.S. Chamber of Commerce, according to the paper. “The support of the chamber, Congress, and business leaders such as Warren Buffett provide a good reason for CEOs and CFOs to approach their boards about stopping giving guidance. Many companies want to stop.”

Market professionals maintain that the short-term orientation of hedge funds, and the growing tendency even among “long-only” managers to shorten their time horizons, are fostering this move away from earnings guidance, the FT pointed out. In reality, though, critics have been bemoaning the short-term orientation of Wall Street for at least four or five decades.

Last week, we pointed out that in a new survey from McKinsey & Co., 83 percent of executives said their companies do not plan to alter their policy on earnings guidance. The survey findings did suggest, however, that most executives continue to issue earnings guidance “in the absence of any clear consensus on its contribution to company value and largely at the insistence of brokerage house analysts.”