Why do public companies give guidance in quarterly reports?
Warren Buffet and James Dimon recently published an article in the WSJ saying public companies shouldn't give guidance in quarterly reports.
From what I understand, they're saying that if a company tells everyone what to expect from them, then people will pull their money out of the company if it does worse than what the company expected, and throw their money in if it does better. This makes the market more unstable because people are pulling out/throwing in their money all at once.
So... why do companies do this? Why do companies give guidance to begin with?
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Basically, because people want it. Shareholders like frequent updates because they like to keep tabs on how their money is doing.
I haven't read the latest op-ed by Buffett and Dimon, but the idea they're espousing is not new. In general, the anti-quarterly-guidance position is not that companies should never issue projections, but more specifically that issuing short-term guidance every quarter induces investors and market analysts to focus on that information. This may in turn cause corporate boards and voting shareholders to take action that is disproportionately influenced by short term performance. Buffett, Dimon, and others are saying that it's better for everyone if companies focus on long-term performance, and that they can encourage others to do so by not producing a steady stream of short-term information for people to fixate on.
Conference calls usually begin with a discussion by company officers of the just released earnings announcement. Though guidance isn't required, they then proceed to discuss management's projection for future performance. Investors deserve full disclosure and transparency and if forward expectations are poor, should they be misled or deceived? Warren Buffet and James Dimon are wrong.
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