Blog - Investing Notes
August
8, 2005 – Earnings Guidance Lags the Market?
In the June 2005 update of their paper entitled "Is Guidance a Macro Factor? The Nature and Information
Content of Aggregate Earnings Guidance", Carol Anilowski, Mei Feng
and Douglas Skinner investigate whether aggregate management earnings
guidance predicts future aggregate earnings news and overall stock market
returns. Using a sample of 31,320 annual and quarterly management earnings
forecasts for 1994-2003 from Thomson First Call, they find that:
- The proportion of firms issuing earnings guidance
increases from less than 10% in the mid-1990s to around 25% in the
early 2000s. Value-weighted percentages are higher.
- Over half of all quarterly earnings guidance is downward,
with the remainder equally divided between upward and neutral. The
ratio of downward to upward guidance varies considerably from quarter
to quarter.
- Companies tend to issue neutral guidance early in
the quarter, downward guidance toward the end of the quarter, and
upward guidance after the end of the quarter. Investors therefore
have a good idea by the end of a quarter of the overall extent of
bad news.
- The fraction of downward quarterly guidance is potentially
informative about aggregate earnings news (see "Figure 6"
below from the paper). The information value of guidance increases
during the quarter, causing the overall impact of guidance to become
more negative as the quarter progresses.
- Aggregate earnings guidance does not predict
quarterly market returns. There is modest evidence of a negative
correlation between monthly changes in the fraction of downward guidance
and monthly market returns, but guidance seems to lag returns.
- Positive market returns in good news quarters tend
to accrue smoothly; negative market returns in bad news quarters concentrate
(along with the negative guidance) in the last few weeks of those
quarters. (See "Figure 5" below from the paper.)
- Earnings guidance issued by the largest firms relates
to overall market returns in short windows around releases.
The following chart, extracted from the paper (and annotated),
illustrates the effect of the concentration of downward guidance near
the ends of quarters.
The next chart, also extracted from the paper, illustrates
the potential informativeness of the proportion of downward earnings
guidance. Bad and good news quarters are defined as in "Figure
5" above.
In summary, while there is a weak negative correlation
between aggregate downward earnings guidance and monthly stock market
returns, the stock market probably leads the guidance.
See also our blog
entry of 5/31/05 on the reaction of individual stock prices to market
news.
