Trend away from earnings guidance reverses

May 29, 2008

NIRI survey finds surge in the practice

NEW YORK -- NIRI has released its comprehensive annual earnings guidance practices survey. Most notable this year is the increase in the percentage of companies providing earnings guidance, reversing a trend that had developed over the last several years.

Sixty-four percent of NIRI members surveyed are providing earnings guidance compared to 51 percent in the 2007 survey and 66 percent in 2006. Also, more companies are providing revenue guidance: 56 percent in 2008, up from 47 percent last year.

The trend may be worrisome for critics of earnings guidance, who have long noted how emphasis on it can lead to earnings management and short-termism. They could take encouragement from the movement toward offering estimates that cover longer time frames. The survey found that the proportion of companies providing quarterly earnings estimates (which NIRI says should not be confused with the frequency with which guidance is offered), are down to 18 percent, from 27 percent in 2007. Longer time frames including annual estimates account for 72 percent, up from 59 percent.

The upward trend in guidance may be a sign of the unstable times. ‘I think [wanting] visibility is a factor in this uncertain economic climate,’ says Arzu Cevik, a strategic research director at Thomson Reuters.

Still, Cevik notes that in a recent Thomson survey, one executive complained about the difficulty of providing accurate guidance in this rocky market environment.

NIRI’s survey, conducted in partnership with CFA Institute, went to over 3,000 NIRI corporate members. Twelve percent responded.

By Anna Snider