Companies tighten up on 'forward-looking statements'

Posted Apr 20th 2009 3:00PM by Zac Bissonnette
Filed under: Forecasts, Management

The Associated Press reports that many publicly traded U.S. companies are cutting back on the amount of forecasting they're willing to do, leaving investors in the dark with little in the way of "forward-looking statements" to rely on.

It's easy to understand why: The tough economy has given many companies trouble in meeting their forecasts, and hell hath no fury like a stockholder or Wall Street analyst whose investment hasn't performed as well as management had predicted.

According to the AP, "A third of the 600 companies responding to a recent survey by the National Investor Relations Institute said their policies about financial guidance had changed. Most eliminated or limited the amount of guidance they provide about earnings and revenue."

This is actually good news for investors, even though it can be annoying in the short-term because it reduces visibility. By not providing detailed short-term guidance, senior management's time is freed up to focus on running the business -- no small task in the current economy. Better yet, they won't be tempted to take short-sighted steps to meet short-term earnings targets at the expense of long-term profitability.

A 2004 survey found that more than half of companies would delay starting a project to meet short-term guidance -- even if that wasn't in the best interests of the company's future. Nearly 80% said they would cut spending on research and development, advertising or maintenance, even though it would have negative long-term consequences.

Traders will complain about this lack of information, but for long-term minded investors, it has no relevance: You can find out what happened when the company reports its results.

Tags: Forecasts, inthenews, Management