This Note focuses on one factor—earnings per share (EPS) guidance—that contributes to myopic behavior and short-termism within public companies. Part I discusses the history of the shareholder primacy norm and the need for management to act in the best interest of its shareholders. Additionally, this Part provides background on EPS guidance and the notion of short-termism. Part II lays out a framework for quarterly reporting and argues that the current disclosure requirements should remain intact. This Part addresses the importance of frequency in quarterly reporting and provides two examples—the United Kingdom and Regulation A—of practices with longer reporting frequencies that demonstrate longer interim periods on their own do not deter short-termism. Further, Part II discusses the content of the required disclosures, including the disclosure of forward-looking information, as well as possible implications, including a reduction in transparency and potential for insider trading, that may occur if the SEC decreases the reporting requirements. Part III examines quarterly forward-looking earnings guidance and argues that when management provides EPS guidance, it incentivizes short-term behavior that is suboptimal for investors. Part III additionally discusses in detail earnings reports and EPS guidance, including a discussion on analysts’ role in calculating EPS and the ability for continued calculation. This Part is designed to demonstrate that it is how management reacts to EPS guidance that leads to short-termism. Further, this Part provides two examples of companies that provide annual EPS guidance and quarterly EPS guidance illustrating how, regardless of frequency, management still behaves myopically. Part IV explores specific ways management manipulates and deters long-term growth to ensure the company meets or exceeds their EPS guidance. This Part seeks to demonstrate that management’s myopic behavior occurs as a result of issuing EPS guidance. Part V argues that by preventing companies from issuing EPS guidance the company will be better equipped to focus on long-term growth initiatives, which are in the shareholders’ best interests. This Note concludes by suggesting companies will better align their interests with investors and provide management with the flexibility needed to pursue long-term goals by replacing EPS guidance with long-term roadmaps, overall reducing short-termism.
Rachel G. Miller,
A Practice Worth Ending: EPS Guidance Harming Long-Term Growth,
Notre Dame L. Rev.
Available at: https://scholarship.law.nd.edu/ndlr/vol95/iss1/10