The Triangle of Guidance, Revisions and Surprise From … · The Triangle of Guidance, Revisions...
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The Triangle of Guidance, Revisions and Surprise From A Practitioner's Perspective Northfield’s 22nd Annual Research Conference Keith Quinton Fidelity Management & Research June 2nd 2009
Transcript of The Triangle of Guidance, Revisions and Surprise From … · The Triangle of Guidance, Revisions...
The Triangle of Guidance, Revisions and Surprise From A Practitioner's Perspective
Northfield’s 22nd Annual Research Conference
Keith Quinton
Fidelity Management & Research
June 2nd 2009
Page 1
Guidance Research Agenda
• Definition
• Academic review
• Dataset
• Fundamental feedback
• Characteristics of “Guiders”
• Guidance – univariate return findings
• Guidance – interactions and return findings
• Conclusion
Page 2
Revisions, Surprise and Guidance
EarningsValuationGrowth
MomentumSentiment
Earnings SurpriseSince 1980’s
SUE = “forever”Heavily researched
Millions of observations
Estimate RevisionSince 1978
Heavily researchedMillions of observations
GuidanceSince 2000-ishLittle researchthousands of observations
Page 3
Academic Review
• Sparse and mostly stale
• Small datasets or “derived” guidance
• Management behavior– Litigation, option awards, insider buys and sells, reputation, changing guidance
behavior
• Analyst behavior– Accuracy, range, herding
• Market behavior– Pre, during, post, capital markets, behavioral issues
• Regulation– Pre vs. Post Reg FD, conference calls
• See Appendix A
Page 4
Academic Review - Findings
• Negative more likely than positive
• Bigger market reaction to negative vs. positive
• Street estimates tighter for guidance issuers
• Guidance between reports more important
Page 5
Data Set - Sources
• First Call “CIG” database
• Capital IQ
• Factset Earnings Estimates
• Thomson/Reuters
• Bloomberg
• Quinton “hack”
Page 6
Data Set – This Research
• Chose CIG– Best history – length and breadth
– Cross-checked with others
• Messy– Sparse data
– Non-standard format: what and how
– “Wordy”
– Different fiscal periods
Page 7
Fundamental Feedback
• I polled my analysts
• Generally agree with:– Tighter street numbers
– Critical for opaque end markets and operating decisions
– Increased post Reg FD
– Can supersede earnings announcements
– Negative more important than positive
– Management reputation key
Page 8
Characteristics of “Guiders” Study
• Russell 1000 companies
• Monthly at month-end
• FY1 or FQ1 guidance issued w/in the last 90 days
• Median observations
Page 9
Risk CharacteristicsBarra Predicted Beta
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
Bet
a
GUIDANCE NO GUIDANCE
Barra Volatility Factor
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
VO
L
GUIDANCE NO GUIDANCE
Barra SIZE Factor
-1.80
-1.70
-1.60
-1.50
-1.40
-1.30
-1.20
-1.10
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
SIZ
E
GUIDANCE NO GUIDANCE
Number of Companies
100
200
300
400
500
600
700
800
900
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
#
GUIDANCE NO GUIDANCE
Page 10
EPS CharacteristicsEPS Variablility
15
17
19
21
23
25
27
29
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
5 Y
ear
Var
iab
ility
Aro
un
d T
ren
d
GUIDANCE NO GUIDANCE
Earnings Dispersion
0
2
4
6
8
10
12
14
16
18
20
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
ST
D o
f E
stim
ates
- a
s a
% o
f M
ean
GUIDANCE NO GUIDANCE
EPS Range
0
5
10
15
20
25
30
35
40
45
50
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
(Hig
h -
Lo
w)/
Mea
n a
s a
%
GUIDANCE NO GUIDANCE
Forward Earnings Yield
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
1999
12
2000
06
2000
12
2001
06
2001
12
2002
06
2002
12
2003
06
2003
12
2004
06
2004
12
2005
06
2005
12
2006
06
2006
12
2007
06
2007
12
2008
06
2008
12
2000 - present
No
rmal
ized
w/in
Sec
tor
GUIDANCE NO GUIDANCE
Page 11
Characteristic Summary
• “Guiders” – Less volatile EPS and Price
– Tighter consensus forecasts
– Bigger size
– Lower Beta
– Cheaper
• Watch for divergences:– Number of guiders/non-guiders
– Valuation
Page 12
Univariate Return Findings
• Fairly short-term effect
• Prices lined up announcement date -1 day; indexed to 100 and computed relative to an equally-weighted S&P 500
• -30 to +30 days is daily; 35-90 is weekly (trade days)
• Show average values for various groups
• Usually red represents a category with negative prior beliefs; green positive
• Usually solid lines are positive guiders; dashed lines are negative
• 5/31/01 – 6/30/08 daily
Page 13
Positive Versus Negative Guidance
94
96
98
100
102
104
106
108
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
All(19811) Positive(3740) Negative(2769)5/31/2001 = 6/30/2008
Guidance and Earnings Surprise
94
96
98
100
102
104
106
108
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(3740) + and +ES(2252) + and -ES(295) Negative(2769) - and +ES(880) - and -ES(411)
5/31/2001 = 6/30/2008
Guidance and Earnings Cycle
94
96
98
100
102
104
106
108
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(3740) + and On(2655) + and Off(1085) Negative(2769) - and On(1375) - and Off(1394)
5/31/2001 = 6/30/2008
Guidance and Valuation
94
96
98
100
102
104
106
108
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(3740) + and Cheap(906) + and Expensive(731) Negative(2769)
- and Cheap(1031) - and Expensive(361)
5/31/2001 = 6/30/2008
Page 14
Guidance and Estimate Revision
94
96
98
100
102
104
106
108
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(3740) + and +EM(1070) + and -EM(594) Negative(2769) - and +EM(280) - and -EM(1198)
5/31/2001 = 6/30/2008
Guidance and 9 Month Relative Strength
94
96
98
100
102
104
106
108
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(3740) + and -PM(657) + and +PM(1296) Negative(2769) - and +PM(530) - and -PM(1081)
5/31/2001 = 6/30/2008
Positive Versus Negative Earnings Surprise
96
97
98
99
100
101
102
103
104
105
106
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
All(23927) Positive(17407) Negative(6520)
5/31/2001 - 6/30/2008
Earnings Surprise and Guidance
96
97
98
99
100
101
102
103
104
105
106
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(17407) + and +Guide(2251) + and - Guide(880) Negative(6520)
- and +Guide(296) - and -Guide(411)
5/31/2001 - 6/30/2008
Page 15
Earnings Surprise and Valuation
96
98
100
102
104
106
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(17407) + and Cheap(4857) + and Expensive(3218)
Negative(6520) - and Cheap(1790) - and Expensive(1425)
5/31/2001 - 6/30/2008
Earnings Surprise and Estimate Revision
96
98
100
102
104
106
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(17407) + and +EM(3249) + and -EM(4285) Negative(6520) - and +EM(797) - and -EM(2141)
5/31/2001 - 6/30/2008
Earnings Surprise and 9 Month Relative Strength
96
98
100
102
104
106
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 55 80
-30 to +30 daily;35 to 90 weekly
Gu
idan
ce T
-1 =
100
; S
&P
500
EW
Rel
ativ
e
Positive(17407) + and -PM(4589) + and +PM(4817) Negative(6520) - and +PM(1079) - and -PM(2640)
5/31/2001 - 6/30/2008
Page 16
Guidance Short-Term Return-Related Conclusions
• General:– More powerful than Earnings Surprise
– Off-cycle more important
– Anticipated by the market in prices
– Dampened by contradictory Estimate Revision
• Positive– Has follow-on performance
– Bigger + impact on negative Price Momentum stocks
• Negative:– More impact than positive
– No follow-on performance
– Hurts cheap stocks more (Value traps?)
Page 17
“Longer Term” Research
• Russell 1000 companies
• More classical month-end observations versus subsequent 1 and 3 month returns relative to the R1000
• 5/31/01 – 12/31/08
• Guidance changed ( + or - ) for either FQ1 or FY1 during the prior month
• Interactions with:– Estimate revision: head counting
– Relative Strength: 9 month
– Valuation: forward earnings yield
– QMODEL: my multi-factor sector neutral quant model
Page 18
Guidance “Longer-Term Return-Related” Results
• Positive vs. Negative:– +41 bp over subsequent 1 month; +71 bp over subsequent 3 months– With confirming Earnings Surprise: +61 bp and +127 bp– +551 bp during the month (coincident return)– With confirming Earnings Surprise: +789 bp (coincident return)
• Little information in guidance vs. Street (Street < company modestly outperform)
• Expensive stocks with + guidance outperform expensive stocks : +56 bp for 1 month; +115 over 3 months
• Negative earnings revision stocks with positive guidance outperform all negative revision names: +75 bp and +104 bp
• Negative 9 month relative strength stocks with positive guidance outperform all negative RS names: +35 bp and +131 bp
• QMODEL Buys with + guidance outperform those with – guidance by +101 bp(1 month) and +150 bp(3 month)
• QMODEL Sells with + guidance outperform all QMODEL Sells by +31 bp(1 month) and +78 bp(3 month)
Page 19
Future Research
• Aggregate guidance data and market, sector and factor timing
• Guidance Surprise vs. Earnings Surprise
• Other guidance: sales, cash flow, etc.
• Different cap ranges; growth/value; by sector
• Quarterly vs. Annual
• Accuracy
• Off-cycle guidance and the subsequent EPS report
• The death of earnings surprise
• Linear vs. 0/1 effects
• Guidance and subsequent estimate revisions
• Guidance range and risk
Page 20
Summary
• Validate most academic findings
• Guidance can help with stock picking:– On it’s own and in conjunction with other factors
• More research to be done
Page 21
Appendix: Academic Review
• Abarbanell, J. S., and V. L. Bernard. 1992. “Tests of Analysts’ Overreaction/Underreaction toEarnings Information as an Explanation for Anomalous Stock Price Behavior.” Journalof Finance 47: 1181-1207.
• Aboody, D., and R. Kasznik. 2000. CEO stock option awards and the timing of corporate voluntary disclosures. Journal of Accounting and Economics 29:73-100.
• Ajinkya, B. B., and M. J. Gift. 1984. Corporate managers' earnings forecasts and symmetrical adjustments of market expectations. Journal of Accounting Research 22 (2):425-444.
• Anilowski, C., M. Feng, and D. Skinner. 2007. “Does Earnings Guidance Affect Market Returns? The Nature and Information Content of Aggregate Earnings Guidance.”Journal of Accounting and Economics 44: 36-63.
• Atiase, R. K., H. Li, S. Supattarakul, and S. Tse. 2005. Market reaction to multiple contemporaneous earnings signals: Earnings announcements and future earnings guidance. Review of Accounting Studies 10:497-525.
• Atiase, R. K., S. Supattarakul, and S. Tse. 2006. Price reactions to management earnings forecasts: The incremental effect of managements' prior forecasting reputation: University of Texas at Austin.
• Ball, R. and E. Bartov. 1996. “How Naïve is the Stock Market’s Use of Earnings Information?”Journal of Accounting and Economics 21: 39-337.
• Bartov, E., D. Givoly, and C. Hayn. 2002. The rewards to meeting or beating earnings expectations. Journal of Accounting and Economics 33 (2):173-204.
• Bowen, R., A. Davis, and D. Matsumoto. 2002. “Do Conference Calls affect analysts’forecasts?” The Accounting Review 77: 285-316.
• Chan, W. S. 2003. “Stock Price Reaction to News and No-news: Drift and Reversal After Headlines.” Journal of Financial Economics 70: 223-260.
• Cheng, Q., and K. Lo. 2006. Insider trading and voluntary disclosures. Journal of Accounting Research 44 (5):815-848.
• Conrad, J., B. Cornell, and W. R. Landsman, 2002, When is bad news really bad news? Journal of Finance 57, 2507-2532.
Page 22
Appendix: Academic Review(continued)
• Field, L., M. Lowry, and S. Shu. 2005. Does disclosures deter or trigger litigation? Journal of Accounting and Economics 39 (3):487-507.
• Hassell, J. M., R. H. Jennings, and D. Lasser. 1988. Management earnings forecasts: Their usefulness as a source of firm-specific information to security analysts. The Journal of Financial Research 11:303-319.
• Hoskin, R. E., J. S. Hughes, W. E. Ricks, 1986, Evidence on the incremental information content of additional firm disclosures made concurrently with earnings, Journal of Accounting Research (Supplement) 24, 1-32.
• Hutton, A. P., G. S. Miller, and D. J. Skinner. 2003. The role of supplementary statements with management earnings forecasts. Journal of Accounting Research 41 (5):867-890.
• Hutton, A. P., and P. C. Stocken. 2007. Effect of reputation on the credibility of management forecasts: Dartmouth College.
• Kasznik, R. and B. Lev, 1995, To warn or not to warn: Management disclosures in the face of an earnings surprise, The Accounting Review 70, 113-134.
• Kimbrough, M. 2005. “The Effect of Conference Calls on Analyst and Market Underreaction to Earnings Announcements.” The Accounting Review 80: 189-219.
• King, R., G. Pownall, and G. Waymire. 1990. Expectations adjustment via timely management forecasts: Review, synthesis, and suggestions for future research. Journal of accounting Literature 9:113-144..
• Kothari, S. P., S. Shu, and P. Wysocki, 2005, Do managers withhold bad news? Unpublished paper, MIT Sloan School.
• Lev, B. and S. H. Penman, 1990, Voluntary forecast disclosure, nondisclosure, and stock prices, Journal of Accounting Research 28, 49-76.
• Matsumoto, D. A. 2002. Management's incentives to avoid negative earnings surprises. The Accounting Review 77 (3):483-514.
• McKay, P. “Numbers Game: Why ‘Guidance’ May Not Matter.” The Wall Street Journal, July 23, 2007.
Page 23
Appendix: Academic Review(continued)
• Miller, G. S., 2002, Earnings performance and discretionary disclosure, Journal of Accounting Research 40, 173-204.
• Patell, J. M. 1976. Corporate forecasts of earnings per share and stock price behavior: Empirical tests. Journal of Accounting Research 14 (2):246-276
• Penman, S. H. 1980. An empirical investigation of the voluntary disclosure of corporate earnings forecast. Journal of Accounting Research 18:132-160.
• Pownall, G., and G. Waymire, 1989, Voluntary disclosure choice and earnings information transfer, Journal of Accounting Research (Supplement) 27, 85-105.
• Richardson, S, S. Teoh, and P. D. Wysocki. 2004. The walkdown to beatable analyst forecasts: The roles of equity issuance and insider trading incentives. Contemporary Accounting Research 21(4): 885-924.
• Rogers, J. L., and P. C. Stocken. 2005. Credibility of management forecasts. The Accounting Review 80(4): 1233-1260.
• Shane, P., and P. Brous. 2001. “Investor and (Value Line) Analyst Underreaction to Information about Future Earnings: The Corrective Role of Non-Earnings-Surprise Information.” Journal of Accounting Research 39: 387-404.
• Skinner, D. J. 1994. Why firms voluntarily disclose bad news. Journal of Accounting Research 32 (1):38-60.
• Skinner, D. J., 1997, Earnings disclosures and stockholder lawsuits, Journal of Accounting and Economics 23, 249-282.
• Soffer, L. C., S. R. Thiagarajan, and B. R. Walther. 2000. Earnings preannouncement strategies. Review of Accounting Studies 5 (1):5-26.
• Trueman, B. 1986. Why do managers voluntarily release earnings forecasts? Journal of Accounting and Economics 8:53-71.
• Waymire, G., 1984, Additional evidence on the information content of management earnings forecasts, Journal of Accounting Research 22, 703-718.
• Williams, P. A. 1996. The relation between a prior earnings forecast by management and analyst response to a current management forecast. The Accounting Review 71 (1):103-113.
• Yermack, D. 1997. Good timing: CEO stock option awards and company news announcements. Journal of Finance 52 (2):449-476.
