A recent article in IR magazine underscores the rising number of firms that have stopped issuing quarterly guidance since the pandemic began in March of this year, adding to an already growing contingent that have abandoned the practice over the last decade.

“If this trend holds, it will be one of the few slivers of a silver lining of the last few months,” the article argues, adding that issuing quarterly earnings guidance creates “a critical channel through which short-termism impacts companies and capital markets. By yoking management teams to self-imposed short-term targets, quarterly guidance ensures companies will focus on this time horizon and that markets will notice.”

According to the article, recent research shows that short-term metrics “may lead companies to prioritize decisions that will yield the most attractive results on a quarterly basis” and therefore may result in the sacrifice of valuable investment opportunities for long-term gain. It also cites a 2015 Harvard study that showed short-term focus attracts more transient shareholders and is linked to lower earnings growth, higher cost of capital and a lower return on equity.

The article rebuts the following long-held industry assumptions regarding quarterly EPS forecasts:

• Reduced volatility: “If the past two weeks have shown us anything, it’s that the opposite is true,” it notes, adding that between 2010 and 2016, those companies offering annual forecasting experienced lower earnings volatility that those issuing quarterly guidance.
• Improved valuations: The article states that analysis of the S&P 500 found that guidance policy had “no effect on valuations whatsoever.”
• Investors want quarterly estimates: “In repeated surveys of the buy side, earnings guidance given for periods of less than one year was consistently deemed irrelevant in evaluating a company’s future prospects,” the article reports.

The article concludes that quarterly guidance is “counterproductive in building the kind of investor base long-term companies need” and in fact encourages companies to lose focus on the fundamental drivers of their businesses that can “unlock future value and the steps required to get there.”