How Corporate Managers Think about Forward-Looking Guidance

Headlines during earnings season often focus on the forward-looking guidance corporate managers provide. Yet, questions remain about managers’ perceptions of the guidance process and the tradeoffs they face in deciding whether and what to guide. To gain greater insight, we surveyed 357 managers at publicly listed corporations and conducted nine in-depth interviews.

Our survey sheds light on the critical role guidance plays during earnings season. Because analysts and investors dislike surprises, our respondents said guidance provides an effective channel to manage expectations. Around earnings announcements, corporate managers commonly meet privately with analysts and investors after conference calls. Our respondents said that providing guidance allows for more open and forthcoming discussions about the future in one-on-one meetings, with less concern that the conversation will run afoul of disclosure regulation (Reg FD).

Our study also highlights some downsides of issuing guidance. We find that reporting results that fall short of guidance is a primary concern because it signals a failure to understand the business or a lack of control of the company’s operating environment. The anticipated consequences of missing guidance include reduced credibility of future guidance, increased scrutiny from sell-side analysts and the board of directors, and stock price declines.

Despite the consequences of missing guidance, managers said they are unlikely to stop providing it. The only factor managers overwhelmingly said would cause them to stop guiding is economic uncertainty – not expected poor future performance, other firms stopping, regulatory or political scrutiny, stock price declines, reputation damage, analysts or investors consistently overreacting to guidance, or proprietary or competitive costs. Given that we launched our survey soon after the onset of the COVID-19 pandemic, it is perhaps unsurprising that widespread uncertainty could be a reason for stopping guidance. Nevertheless, that few factors would cause managers to end guidance raises two possibilities: that managers lack an off-ramp for stopping guidance, or that guidance is too important to forego.

A longstanding public debate on the merits of quarterly EPS guidance has centered on whether providing guidance causes managers to behave myopically, sacrificing long-term value to meet short-term targets. Managers reported concern that guidance causes analysts and investors to focus too heavily on short-term results, but are much less concerned about it altering their own investing or financial reporting decisions. This highlights the delicate balance managers face between providing analysts and investors with information and fending off pressure to make decisions exclusively to meet quarterly EPS targets. Interestingly, we also surveyed managers of companies that do not provide guidance, and they said that if they issued guidance, they would be concerned about caving to short-term pressures for myopic operating and investing decisions.

While safe harbor laws are designed to protect managers when disclosing forward-looking information, class action lawsuits abound. Our respondents expressed relatively little concern about litigation resulting from their guidance. In contrast, roughly half of the respondents from non-guiding companies are very concerned about guidance-related litigation.

An important question that has eluded researchers is whether guidance reflects managers’ unbiased best estimate of future performance. Our respondents said that when they issue guidance, they typically communicate a lower future performance number than their private expectation (i.e., guidance is typically conservative). This gives them leeway for unexpected downturns and encourages sell-side analysts to issue beatable forecasts.

It is difficult to know how confident managers are that they will report results that meet their own guidance. Ninety percent of our respondents said they are at least 70 percent confident that their reported results will meet their guidance, indicating that managers are confident in the guidance they provide. However, when we compare these figures to historical guidance outcomes, the firms represented in our sample meet their initial guidance only 31 percent of the time, suggesting managers overestimate the accuracy of their guidance.

We also asked corporate managers about 13 intended audiences for guidance. Our respondents said guidance is typically prepared and issued for long-term-oriented investors and sell-side analysts, although some managers also said they have employees, hedge-funds, and individual retail investors in mind. Finally, our respondents said the most important performance benchmark is their most recent earnings guidance, followed by the guidance issued at the start of the quarter, the analyst consensus, and earnings for the same quarter last year.

This post comes to us from Andrew C. Call at Arizona State University’s W.P. Carey School of Accountancy, Paul Hribar at the University of Iowa’s Henry B. Tippie College of Business, Douglas J. Skinner at the University of Chicago’s Booth School of Business, and David Volant at the University of Iowa’s Henry B. Tippie College of Business. It is based on their recent paper, “Corporate Managers’ Perspectives on Forward-Looking Guidance: Survey Evidence,” available here.