Does the cessation of quarterly earnings guidance reduce investors’ short-termism?

Abstract

The practice of providing quarterly earnings guidance has been criticized for encouraging investors to fixate on short-term earnings and encouraging managerial myopia. Using data from the post-Regulation Fair Disclosure period, we examine whether the cessation of quarterly earnings guidance reduces short-termism among investors. We show that, after guidance cessation, investors in firms that stop quarterly guidance are composed of a larger (smaller) proportion of long-term (short-term) institutions, put more (less) weight on long-term (short-term) earnings in firm valuation, become more (less) sensitive to analysts' long-term (short-term) earning forecast revisions, and are less likely to dismiss chief executive officers for missing quarterly earnings targets by small amounts, relative to investors in firms that continue to issue quarterly earnings guidance. Our study provides new evidence of the benefit of stopping quarterly earnings guidance, that is, the reduction of short-termism among investors.

Industrial foundations as long‐term owners

“…Scholars, politicians, and executives argue that companies pursue short‐run profitability (McKinsey & Company, ) at the expense of long‐run investments (Sampson & Shi, ) and sustainability (Stiglitz, ). The perceived trends are blamed on corporate governance‐related issues like incentive pay (Bhagat & Bolton, ; Bolton, Scheinkman, & Xiong, ; Ladika & Sautner, ), quarterly reports (Kim, Su, & Zhu, ), share analysts (DesJardine, ), takeover threats (Asker, Farre‐Mensa, & Ljungqvist, , ; Stein, , ; Wang, Zhao, & He, ), managerial turnover (Kaplan & Minton, ), or speculative stock market fluctuations (Cremers, Pareek, & Sautner, ). Several remedies have been suggested including loyalty shares (extra voting rights or dividends for long‐term shareholders; Johnson, ; Solomon, ), abolishing quarterly reports and earnings guidance (Kay, ), bonus caps (the EU Capital Requirements Directive), or limiting hostile takeovers (Milliband, ).…”

Earnings guidance: market pressure or corporate governance? Evidence from corporate innovation in China

“…In line with this, Cheng et al (2005) find that firms that issue more earnings forecasts are more likely to reduce their investments in R&D. Koch et al (2012) demonstrate that when guiders are acquired by non-guiders, acquisition premiums arise from the belief that the former’s resources can be redeployed toward more productive long-term uses. Therefore, discontinuing guidance may help reduce short-termism (Hu et al , 2014; Kim et al , 2017). Michael Dell, the CEO of Dell Technologies, claims that relieving firms of the need to issue guidance could enable them to engage in more innovation and risk-taking [2].…”

“…In support of this, Kross et al (2011) find that firms issuing earnings guidance experience larger stock price declines than firms that do not when they both miss market expectations. Accordingly, stopping earnings guidance significantly reduces short-termism among investors, resulting in a decrease in external pressure on managers (Kim et al , 2017).…”

Does share capital mater for company performance?

“…The public company is now just one of the many securities. Investors make their decisions in blocks (Windolf, 2016), counting mainly on the short-term benefit (Kim et al, 2017), which has already been called short-termism (Tonello, 2006). Stock prices break away from the fundamentals, and even such absurd situations as the negative impact of profitability on valuation can be observed (Table 5 Panel B1).…”