Investors Reward Guidance, Even if News Is Bad - Capital Markets - CFO.com

Investors Reward Guidance, Even if News Is Bad - Capital Markets - CFO.com

Investors Reward Guidance, Even if News Is Bad

Companies that provided early warnings when they expected to miss an estimate enjoyed better returns than those that failed to announce an earnings miss beforehand, a new study finds.

Kate O'Sullivan - CFO.com US
July 30, 2009

Excerpts:

a new study from investor-relations firm Sharon Merrill Associates and research firm eventVestor finds that companies that provide earnings guidance and preannounce earnings surprises realize superior stock-price performance compared with firms that don't provide such communications.

The study, which analyzed stock-price returns for the S&P 500 and the Russell 1,000 in the 10 trading days before and 20 trading days after preannouncements and earnings announcements during the first quarter of 2009, found that companies that provided guidance performed better than those that did not, even when their actual earnings missed analysts' estimates. When they exceeded analysts' expectations, they outperformed other companies that also did better than expected but did not provide guidance.

Those that provided early warnings when they expected missed estimates experienced better returns than companies that failed to preannounce an earnings miss. "We were very surprised by that finding," says Maureen Wolff-Reid, president and partner at Sharon Merrill, adding that many executives think their companies will be punished twice for coming out with an early report that they are going to miss analysts' targets: once with a decline on the day of the announcement and again when they formally release the full quarterly results. "Because the first quarter was a pretty negative quarter, it could be that investors thought results were going to be a lot worse," she says. "Getting the information out there right away put a floor in for people." Sharon Merrill's analysis also revealed that companies that promptly followed a quarterly earnings miss with a downward adjustment to their annual guidance performed better than those that let their annual number stand despite a disappointing quarter.

Read full article: http://www.cfo.com/article.cfm/14154582/c_2984367?f=JacobsExecutiveAdvisors

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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.