The practice of U.S. public companies issuing quarterly earnings-per-share (EPS) guidance is coming under increased scrutiny and criticism. For more than a decade, analysts and investors have eagerly anticipated these forecasts — and the ensuing stock price fluctuations — every three months (or more often, as adjustments are made). Opponents of providing quarterly EPS guidance have argued that the pressure it puts on companies to meet or exceed the forecasts each quarter results in “short-termism” to the detriment of long-term, value-creating business strategies. [FOOTNOTE 1] Short-term investors, such as hedge funds, tend to like forecasts and earnings guidance because the differences between actual and forecasted EPS may provide profitable trading and arbitrage opportunities. [FOOTNOTE 2] As the anti-quarterly-guidance movement gathers steam, companies — whose executives, in general, would be delighted to avoid the time-consuming and stressful process of preparing earnings forecasts at least four times per year — appear to be trending away from quarterly EPS guidance toward a more nuanced, individualized disclosure model.
Two high-profile reports were recently issued calling for the permanent elimination of quarterly earnings guidance. In March 2007, an independent commission established by the U.S. Chamber of Commerce issued a report in which one of the primary recommendations focused on ending the practice of quarterly guidance; [FOOTNOTE 3] and last month, the Aspen Institute released a set of principles for long-term value creation that advocated against the use of quarterly estimates, and was signed by a wide-ranging coalition of business and investor organizations, large companies, pension funds and trade unions. [FOOTNOTE 4]