Earnings guidance

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Professor of accounting at Goizueta Business School, Shivaram Rajgopal was recently quoted in an article titled, “Earnings guidance: Companies’ forecasts can do them as much harm as good” by The Economic Times.

Using the company Infosys as an example, The Economic Times claims that breaking the “habit” of providing investors with a quarterly guidance, even in bad times, is uncalled for.  When Infosys decided not to give guidance for the July-September quarter of 2012 because they were “not sure” of the economic environment, unfolding events, and client decisions, their stock experienced an 8% drop.

To explain these findings, the article references a research paper titled “Is Silence Golden? An empirical analysis of firms that stop giving quarterly guidance” co-authored by Rajgopal.  According to the paper, firms are more likely to stop giving guidance if its managers are certain that they will have bad news in the future which leads to an increase in the variance of analysts forecasts and a drop in the accuracy of analyst forecasts.

As Rajgopal says in the article, quarterly guidance is like a treadmill you can’t get off. “Missing earnings guidance is like having the ‘cockroach problem’. If you walk into a house and find a cockroach, you believe there are more hidden. Analysts believe the same when a company misses its guidance or stops guidance.”

Shivaram Rajgopal joined Goizueta Business School in June 2010. Prior to joining Emory he was a chaired professor in the Foster School of Business of the University of Washington. Shiva’s research focuses in two areas: the investigation of the determinants and consequences of financial reporting strategies, and the exploration of the relationships between executive compensation (stock options) and the executive behavior such as risk taking.  He has been published in the several journals including the Journal of Accounting and Economics as well as the Journal of Financial Economics.

To see the full article in The Economic Times click here.

– Meredith Farahmand

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