Providing Guidance for an Investor Relations Department

Steven M. Bragg

• Publisher: Wiley
• Year: 2010
• Print ISBN:
  9781118108338
• Edition: 1
• eBook ISBN:
  9781118009574
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Praise for Running an Effective Investor Relations Department: A Comprehensive Guide

"Mr. Bragg has provided a comprehensive guide on how to be effective in today's ever increasingly difficult job of investor relations. I highly recommend this for any company dealing with outside investors."—Wray Rives, CPA, President, NeedaCFO.com

"At long last, a comprehensive introduction to the important topic of investor relations. CFOs, treasurers, and those who aspire to those positions would be well served to read this comprehensive guide."—Richard Booth, Vice President of Finance, Nuance Communication, Inc.

"This book is a must-read for anyone involved with investor relations, from the executive team to front-line employees. In this age of M&A and venture capital funding, investor relations will become increasingly important to the overall success of organizations of every size. Running an Effective Investor Relations Department is a vital tool."—Chris D'Angelo, Controller, Executive Health Resources

"Running an Effective Investor Relations Department is an informative, concise, clearly written guide for either the employee new to the investor relations team or the experienced investor relations officer. The book gave me an in-depth overview on the 'how to' part of dealing with investors. This subject is much overlooked on the bookshelves. This book will definitely get shelf space in my office and will come in handy as I deal with the buy side."—Douglas Shaeffer, Controller, Aberdeen Townhomes

"Running an Effective Investor Relations Department provides true guidelines for strategically communicating a company's goals to the investment community. It makes you think and work on how to methodically manage IR metrics for both good times and crisis situations. This is a must-read for the IR profession."—Shan Staka, Accounting Manager, PGP International

CHAPTER ELEVEN

Providing Guidance

MOST LARGER PUBLIC COMPANIES provide some form of earnings guidance to the investment community. It is an important part of how the sell side and buy side determine valuation, and so is a key responsibility of the IRO. In this chapter, we will cover whether a company should issue guidance, what form guidance should take, the frequency and timing of guidance, and how to create a guidance policy.

WHETHER TO PROVIDE GUIDANCE

Before getting into a discussion about the form and frequency of guidance to provide, we must first consider whether a company should provide any guidance at all.

Without guidance, analysts and investors have no idea how a company will perform in the future, and so must make their own estimates of the situation. These estimates may vary considerably from each other. The result is a heightened amount of stock price volatility, since everyone is assuming a different future earnings level.

Stock price volatility is not a desirable state of affairs for a company. It tends to attract short sellers, who make money from rapid changes in the stock price (see Chapter 15). It also drives away institutional investors, who prefer stocks whose prices move within a narrow range. Since institutional investors are driven away, there is less demand for a company's stock and its price will decline. This results in a higher cost of capital for the company since it must issue more shares in order to obtain a specific amount of cash. Thus, there are serious consequences to not providing guidance.

Also, a company may have no analyst following, which is the norm for microcap entities. If so, there is no one who can independently provide earnings predictions to the buy side, which leaves the marketplace completely devoid of information if a company refuses to provide guidance. This situation is most likely to result in excessive stock price volatility. Thus, in order to avoid volatility, the absence of analysts makes it even more necessary to provide guidance.

Though thes...

Table of contents

• Cover
• Title Page
• Copyright
• Chapter 11: Providing Guidance