Earnings Guidance - Part of the future or the Past?

KKS Advisors & The Generation Foundation / January 2014
Gabriel Karageorgiou and George Serafeim

Our report with The Generation Foundation  sheds light on the long-standing debate around the impact of regular Earnings Guidance. We start by investigating the forces behind Earnings Guidance and we follow its evolution over the years. We review the current landscape analyzing the number of companies providing Earnings Guidance around the world and relate Earnings Guidance activity to ownership structures. Following an extensive literature review, where we discuss the (perceived) benefits and (actual) costs of the practice, we conclude that despite the benefits being intuitive, there is little evidence supporting regular issuance of guidance. On the other hand, the costs are real and can have a significant and negative impact on the firm’s long-term competitiveness. We propose an action plan for CEOs that want to abandon Earnings Guidance while minimizing any short-term stock price effects. Moreover, we recommend a new framework of corporate communication (Integrated Reporting and Integrated Guidance) that is likely to improve the firm’s information environment and the communication channels with its stakeholders, supporting the execution of a sustainable strategy

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