how company guidance works
company guidance is typically released immediately after a company publishes its latest quarterly earnings report and is often discussed in depth during a meeting between industry analysts and company executives companies are not legally required to provide earnings guidance although it is common practice for many of them to do so the information guidance is based on normally includes sales projections market conditions and anticipated company spending some companies provide guidance on other aspects of their financial activities too such as inventory units sold and cash flow a company may revise its earnings guidance upwards or downwards later in the quarter if its outlook changes significantly impact of company guidanceproviding forecasts to investors is one of the oldest wall street traditions in earlier times earnings guidance was called the whisper number the only difference is that whisper numbers were given to only selected individuals such as analysts or brokers so that they could inform their big clients fair disclosure laws known as regulation fd made this illegal and companies now have to broadcast their expectations to the world giving all investors access to this information at the same time any comments management make about the company s future prospects are studied closely by investors an inside perspective on how business is faring since the last figures were collected and is likely to develop in the coming months can potentally trigger a share price rerating guidance reports tend to significantly influence analysts stock ratings which affect many investors decisions on whether to buy hold or sell a stock for example if a company s management dispenses guidance figures that fall well below market expectations a number of analysts will probably downgrade the stock causing many investors to dump it special considerationsthere is always a risk that a company s guidance may turn out to be wrong few investors mind if the company low balls its estimate many are irate if they miss their stated goals in the u s safe harbor provisions protect companies from being sued if they fail to meet their own forward looking expectations most notably in 1995 congress enacted the private securities litigation reform act pslra which helps shield companies from securities fraud lawsuits stemming from unachieved expectations to further protect themselves from lawsuits companies pair their guidance reports with disclosure statements maintaining that their projections are by no means guaranteed companies are under no obligation to update their guidance after initial reports are issued even if subsequent events render their projections unlikely some do however in order to get the bad news out there before the earnings release date advantages and disadvantages of company guidancesome in the investment community feel that guidance does a company and its investors more harm than good investment guru warren buffett recently called for companies to stop issuing quarterly earnings guidance he believes that it forces companies to place too high a priority on making the numbers at the expense of nurturing the long term interests of the business others disagree believing that quarterly earnings reports cause investors to become more educated about short term results versus long term initiatives proponents also believe that providing less information to the public would not inevitably reduce stock volatility 