What is Guidance?
In theworld, guidance refers to public communication from a company regarding expectations.
How Does Guidance Work?
The world of analysts covering the , because the analysts incorporate the information into their own research and earnings forecasts for their clients.
Before August 2000, it was legal for public companies to provide guidance to chosen analysts rather than publicly disclose their guidance. The SEC's adoption of Regulation FD in August 2000 prohibited this selective disclosure of material nonpublic information, and public companies must now publicly disseminate guidance and earnings estimates to analysts all at the same time.
When management becomes aware that the company probably not meet the expectations it previously communicated, the company typically a via press release or conference with analysts several weeks before announcing quarterly earnings.
Why Does Guidance Matter?
Guidance considerably influences stock's potential. If investors expect a company to report, say, $0.10 in per share next quarter, but the company actually reports $0.08, many investors might sell the stock and the company's stock price therefore probably fall after the announcement. Conversely, if the company reports $0.12, the stock price probably rise. The degree of "miss" or "surprise" influences how much the stock price will change. This is why guidance is usually a company's attempt to "soften the blow" or “fluff the pillows” before announcing earnings.
Some companies do not give guidance. They usually make that choice to reduce legal liability in the event that management's estimates are wrong. Some analysts claim that companies that do not any guidance often receive a "break" on stock price changes when these companies miss earnings, because the is aware that the company's management has given the analysts (and their resulting estimates) no input.