A study from the University of Iowa found that chief financial officers (CFOs) overestimate their ability to issue accurate earnings guidance.
It also found that CFOs will continue offering quarterly earnings guidance to analysts and investors despite criticism that it encourages short-term thinking from managers, according to a press release.
Paul Hribar, professor of accounting at the University of Iowa’s Tippie College of Business, was part of a team of researchers that surveyed 357 financial officers at publicly traded companies. Here were their findings:
- 90% of respondents said they are at least 70% confident their reported results will meet their guidance. However, the firms represented met their initial guidance only 31% of the time.
- Managers typically issue lower earnings guidance than they privately expect so they have leeway for economic downturns. It also encourages sell-side analysts to issue beatable forecasts.
- CFOs will continue giving earnings forecasts because analysts and investors dislike surprises. Guidance provides an opportunity for discussion on expectations
- CFOs say that removing guidance means they will have reduced credibility of future guidance, stock price declines and increased scrutiny from sell-side analysts and company boards.
- The only thing that would stop guidance from being issues is economic uncertainty.
- Managers did not believe that pressure to focus on short-term results informs their own guidance, but many believe that it does influence managers at other firms.
The full paper is available here.
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