The misguided practice of earnings guidance

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Go to The McKinsey Quarterly home page Visitor Edition 27 November 2007Welcome to the online journal of McKinsey & Company. This article is available to you free as a special bonus. Please register or log in to read this article.


Article at a glance:
The misguided practice of earnings guidance

Many executives believe that providing quarterly earnings guidance helps them to maintain an open channel of communication with investors in their companies and to increase the visibility of those companies while reducing the volatility of share prices and improving share valuations.

Our analysis finds that the practice offers few of the expected benefits and carries its own costs, particularly management time and an overemphasis on short-term performance.

Executives should consider whether providing quarterly earnings guidance is truly necessary—or whether other types of information would better serve the goals of companies and their shareholders.

This article includes the following exhibits:
Exhibit 1: Increasingly, companies are discontinuing guidance.
Exhibit 2: There appears to be no relation between guidance and valuation.
Exhibit 3: Offering guidance does not appear to affect total returns to shareholders.
Exhibit 4: Poor performance affects returns more than discontinuing guidance.

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