Many companies provide “corporate guidance” to investors and other interested parties.
Guidance refers to what management expects the company to do in the future. Essentially, it is the practice of predicting business expectations in order for investors to evaluate the company’s earnings potential.
Photo courtesy of Christian Fregnan (Unsplash.com)
You may recall a similar practice referred to as the “whisper number.” Guidance is similar, only whisper numbers were limited to being provided to select analysts to allow them to warn their largest clients. The illegality of this practice has been codified in fair disclosure laws, so now it is law that companies must provide guidance to all investors at the same time.
Corporate guidance can play an important role in investors’ decision-making processes and it is the only legal means for providing corporate expectations to the market. Presumably, management is in the best position to predict how the company will perform, so any analyst or investor whould be able to use this information in addition to his/her own research to predict future performance with some accuracy.
The downside to relying upon corporate guidance is management teams are aware of the importance placed on their comments, so they use their guidance as a tool for influencing investors. This can result in guidance being too optimistic or too low, depending on the goals of the company. Thus, it is essential for investors to perform their own due diligence in evaluating the guidance that companies provide.
Corporate guidance should be used as a reference point from which to build your predictions. It plays an important role in the market, but it should not be the only factor relied upon in making investment decisions.
If you have any questions about corporate guidance or would like to discussother corporate, securities and investment banking matters, please contact me or the Scarinci Hollenbeck attorney with whom you work.
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