To Guide or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance

Quarterly earnings guidance — managers’ public forecasts of forthcoming earnings — is widespread yet highly controversial. A recent position paper by the CFA Institute and the Business Roundtable emphatically calls on managers to ‘‘end the practice of providing quarterly earnings guidance’’ (CFA Institute 2006, 2). Similarly, the U.S. Chamber of Commerce (2007) publicly implored managers to stop providing quarterly guidance. Arguments for ending the practice of guidance are made by purists, who claim that managers should tend to their business and leave securities valuation and the underlying forecasts of future performance to investors and analysts, and by pragmatists, lawyers in particular, who caution managers that guidance increases litigation exposure. Regulators and commentators are often concerned that a previously issued forecast will motivate managers to meet the guidance even if doing so would require costly changes in real activities, such as cutting capital expenditures or research and development (R&D), and sometimes induce them to manage earnings toward the forecast