When did corporations start offering "guidance" on their stock price?

[ratatoskK]

For example – a story in the NY Times today about Cisco says:

Cisco’s earnings and revenue grew in the latest quarter as demand for its computer networking equipment increased. But CEO John Chambers called the global economy “challenging and inconsistent” and the company said it is cutting about 4,000 jobs, or about 5 percent of its work force.

Cisco’s revenue guidance for the current quarter was weaker than Wall Street expected, and shares fell sharply in extended trading.

When did companies start doing this “guidance” thing? I’m not sure if it’s just that I’m too young to remember, or whether they never used to do this.

When did this start and why? Who wanted it? (Note: I’m not just complaining about Cisco, it also includes pretty much everyone. Not meeting guidance = firing thousands of people even though the company is making good money.)

[Colophon]

The “guidance” isn’t on the stock price, it’s on the company’s earnings. Obviously investors will react to the guidance, which will affect the stock price.

Why do they do it? Because investors want to have an idea of how the company is doing, and are more likely to invest if they are kept in the loop.

Apparently it became more common in the latter half of the 1990s. Have a read of this.

Notice that companies always couch this guidance in warnings about “forward-looking statements” etc etc, i.e. don’t blame us if you bet the farm on our stock and we miss our earnings targets…

[jz78817]

when “Maximizing Shareholder Value” became the sole purpose of a corporation’s existence. Sad that we tie so much of our economy to the wants of gamblers and speculators.

[Terr]

@ratatoskK

When did companies start doing this “guidance” thing? I’m not sure if it’s just that I’m too young to remember, or whether they never used to do this.

The guidance is not on the stock price. It is on future revenues. It’s the company guiding investors on what the company thinks its prospects are in the next few quarter or two. What is wrong with that? As an investor, would you prefer knowing of potential pitfalls?

[ratatoskK]

Thank you to Colophon and jz78817 for the very interesting links. Now I would like to know:

1. Who added the “safe harbor” provision (or lobbied for it) to the 1995 Private Securities Litigation Reform Act, which permits companies to issue guidance.

2. Who created or lobbied for regulation FASB 142 which forces the real write-downs of real assets based on the company’s share price in the expectations market.

[septimus]

Isn’t a big part of the reason to avoid illegal insider trading? If earnings estimates were kept secret, those aware of the secret might be legally precluded from buying or selling shares.

[bizerta]

@jz78817

… Sad that we tie so much of our economy to the wants of gamblers and speculators.

Ahhh, another socialist who thinks (s)he should dictate the laws of society.

Economist Adam Smith said it best: When an individual pursues his own self-interest, he indirectly promotes the good of society.

Gordon Gekko said the same using only three words.

[Colophon]

@bizerta

Gordon Gekko said the same using only three words.

Rather more than three, pop culture notwithstanding.

[ratatoskK]

Can we please stay factual? I really want to know how this guidance thing got started, who did it and why. See my questions above.

[Terr]

An (admittedly biased) discussion of the giving guidance practice

A contrary view

[jz78817]

@bizerta

Ahhh, another socialist who thinks (s)he should dictate the laws of society.

What the fuck are you on about? And where the fuck do you get off calling me a “socialist” based on one message board post?

Economist Adam Smith said it best: When an individual pursues his own self-interest, he indirectly promotes the good of society.

Gordon Gekko said the same using only three words.

A citation is not “quoting two people I agree with, one of whom is a fictional character.”

[ratatoskK]

@ratatoskK

Thank you to Colophon and jz78817 for the very interesting links. Now I would like to know:

1. Who added the “safe harbor” provision (or lobbied for it) to the 1995 Private Securities Litigation Reform Act, which permits companies to issue guidance.

2. Who created or lobbied for regulation FASB 142 which forces the real write-downs of real assets based on the company’s share price in the expectations market.

Can we get back to the topic?

[ratatoskK]

Here’s a related and interesting article in the Washington Post: Maximizing Shareholder Value: The Goal that Changed Corporate America.

Across the United States, as companies continue posting record profits, workers face high unemployment and stagnant wages.

Driving this change is a deep-seated belief that took hold in corporate America a few decades ago and has come to define today’s economy — that a company’s primary purpose is to maximize shareholder value.

The belief that shareholders come first is not codified by statute. Rather, it was introduced by a handful of free-market academics in the 1970s and then picked up by business leaders and the media until it became an oft-repeated mantra in the corporate world.

(…)

The cultural shifts in corporate America have not changed only IBM. The company is merely a representative of what has happened at most large, globalized U.S. firms. But some experts wonder whether these companies have gone too far, leaving the rest of the country behind.

(…)

Lynn Stout, a professor of corporate and business law at Cornell University Law School, traces the transformation to the rise of the “Chicago school” of free-market economists.

In 1970, Nobel Prize-winning economist Milton Friedman wrote an article in the New York Times Magazine in which he famously argued that the only “social responsibility of business is to increase its profits.”

[jbaker]

Historically there have been multiple reasons for providing earnings guidance. Management sees it as a way to convey more information to shareholders, thereby presenting themselves as more shareholder-friendly. Providing guidance is expected to reduce volatility and to reduce the risk of shareholder suits from earnings surprises. (Some analysts question whether this really works.) It is also thought to reduce the risk of insider trading, since the discrepancy between the stock’s real value and its trading price presumably will be less. Companies may also feel under pressure to provide guidance, since their competitors do so.

Earnings guidance usually is not for the distant future, but for the current or most recently concluded fiscal period, before final numbers are available. Companies have been providing earnings guidance for a long time (I easily found an example from 1982, and I don’t think it was by any means a new practice then), but it became more common after two legal developments. First, the Private Securities Litigation Reform Act of 1995, as part of a general effort to cut back on what was perceived as abusive litigation, added safe harbors for forward-looking statements when the statutory requirements were met. Second, the Securities and Exchange Commission in 2000 added Regulation FD (short for Fair Disclosure), which generally requires that company disclosures be made publicly if made at all. Prior to this time companies would just give earnings guidance privately to securities analysts, which would use it in constructing their own estimates of corporate earnings for the benefit of their clients.