Earnings Guidance  681 The answer lies again in the segmentation of the investors and the inter- pretation of investor input in light of the investors’ own strategies. For ex- ample, trading investors, who tend to be the most vocal and frequent voices, base their trading strategies on events. So they prefer frequent announcements and short-term actions to create trading opportunities. Intrinsic investors, in contrast, are more concerned with longer-term strategic initiatives and the broader forces driving the company and industry. Segmenting investor input helps executives sort through the competing views. We typically find that when executives segment the input they receive from investors, the input from the intrinsic investors is most helpful. In the end, though, executives have more information than investors about their company, its capabilities, opportunities, and threats. They need to be confident about their strategic choices and convey that confidence to inves- tors. You can’t expect to please all investors. You must do what’s right for long-term value creation. Earnings Guidance Many executives view the ritual of issuing guidance on their likely earnings per share (EPS) in the next quarter or year as a necessary, if sometimes oner- ous, part of communicating with financial markets. In a survey, we found that they saw three primary benefits of issuing earnings guidance: higher valua- tions, lower share price volatility, and improved liquidity. Yet several analy- ses found no evidence that those expected benefits materialize.8 Therefore, instead of EPS guidance, we believe executives should provide investors with the broader operational measures shaping company performance, such as vol- ume targets, revenue targets, and initiatives to reduce costs. No Payoff for Earnings Guidance It’s a myth that quarterly EPS guidance is necessary and that almost every- one does it. In 2002, Coca-Cola became one of the earliest large companies to stop issuing guidance. Its executives had concluded that providing short-term guidance prevented management from concentrating on strategic initiatives to build its businesses over the long term. Gary Fayard, CFO at that time, believed that, rather than indicating weak earnings, the move signaled a re- newed focus on long-term goals. The market seemed to agree and did not react negatively: Coke’s share price held steady.9 Since then, many other companies 8 P. Hsieh, T. Koller, and S. Rajan, “The Misguided Practice of Earnings Guidance,” McKinsey on Finance (Spring 2006): 1–5; and A. Babcock and S. Williamson, Moving beyond Quarterly Guidance: A Relic of the Past, FCLTGlobal, October 2017, www.fcltglobal.org. 9 D. M. Katz, “Nothing but the Real Thing,” CFO, March 2003, cfo.com. 682  Investor Communications have stopped providing guidance entirely or have shifted the focus of their guidance away from EPS and toward broader indicators of performance. In fact, in 2016, only 28 percent of S&P 500 companies provided quarterly EPS guidance, while 31 percent gave only annual guidance. Forty-one percent gave no EPS guidance.10 In Europe, the share of companies providing EPS guidance is much lower: only 4 percent of the Eurostoxx 300. To test whether companies providing EPS guidance are rewarded with higher valuations, we compared the earnings multiples of companies that pro- vided guidance with the multiples of those that did not, industry by industry. For most industries, the underlying distributions of the two sets of companies were statistically indistinguishable. Similar results were found by researchers at the Harvard Business School and KKS Advisors.11 Companies that decide to begin offering guidance may hope the effort will boost total shareholder returns (TSR). Yet in the year companies begin to offer guidance, their TSR on average is no different from that of companies not of- fering guidance at all. Returns to shareholders are just as likely to be above the market as below the market in the year a company starts providing guidance. On the issue of share price volatility, we found that when a company be- gins to issue earnings guidance, the likelihood of volatility in its share price increasing or decreasing is the same as it is for companies that don’t issue guidance. Finally, we found that when companies begin issuing earnings guidance, they do indeed experience an increase in trading volumes relative to companies that don’t provide it, as their management anticipates. However, the effect wears off the next year. The same results were found by the Harvard Business School researchers and KKS Advisors.12 When we asked executives about ceasing earnings guidance, many feared that their share price would decline and its volatility would increase. But when we analyzed 126 companies that had discontinued issuing guidance, we found they were just about as likely as the rest of the market to see higher or lower shareholder returns. Of the 126 companies, 58 had higher returns than the overall market in the year they stopped issuing guidance, and 68 had lower returns. Furthermore, our analysis showed that the lower-than- market returns of companies that discontinued guidance resulted from poor underlying performance, not from the act of ending guidance. For example, two-thirds of the companies that halted guidance and experienced lower re- turns on capital saw lower TSR than the market. For companies that increased ROIC, only about one-third had delivered lower TSR than the market. Our conclusion was that issuing guidance offers companies and investors no real benefits. On the contrary, it can trigger real costs and unfortunate un- intended consequences. The difficulty of predicting earnings accurately, for 10 Babcock and Williamson, Moving beyond Quarterly Guidance. 11 Babcock and Williamson, Moving beyond Quarterly Guidance. 12 Babcock and Williamson, Moving beyond Quarterly Guidance.