The earnings guidance fallacy

Contrary to what some executives believe, frequent earnings guidance doesn’t raise market valuations; indeed, it appears to have no significant relationship with them—regardless of the year, the industry, or the size of the company in question. From 1994 to 2004 the median multiples of consumer-packaged-goods businesses tracked one another fairly closely, whether or not they issued earnings guidance. And while from 2001 to 2004 companies that did issue it had higher median multiples than companies that didn’t, the underlying distribution of multiples for both groups was comparable. In fact, the averages of the two distributions are statistically indistinguishable. McKinsey had similar findings for other industries, though their smaller samples generated more scattered data.

Read “The misguided practice of earnings guidance” (March 2006) for more on why companies should disclose their long-range strategic goals and business fundamentals instead of speculating about their short-term performance. (Guest passed through December 3)