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Dec 08, 2015

Australian firms shy away from earnings guidance

Study shows proportion of companies offering guidance fell 10 percentage points in two years

The proportion of companies on Australia’s ASX 200 that offer earnings guidance has fallen steadily in the last three years amid fear of class action suits from investors saying they were misled by such forecasts, according to a study from corporate advisory firm McGrathNicol.

Fewer than half (49 percent) of companies on the exchange offered earnings guidance in 2015, down from 57 percent last year and 59 percent in 2013, according to the study of 104 companies in seven sectors.

‘The decline in disclosure rates over the past three years suggests companies are becoming more prudent in providing information to the market as a result of increased investor scrutiny, regulatory oversight and litigation consequences if guidance proves to be wrong,’ the study authors write.

Earnings guidance was released most commonly in the building products sector, with 69 percent of companies offering financial forecasts this year, down from 77 percent last year. In the transportation sector, the proportion of companies offering guidance fell to 27 percent from 64 percent and, in the retail sector, it dropped to 20 percent from 47 percent.

In the latest examples of companies suffering severe consequences for earnings outlooks, shares of cleaning and catering contractor Spotless plunged more than 40 percent on December 2 after it issued a profit warning 18 months after the firm’s IPO. Days earlier, shares of electronics retailer Dick Smith fell by a third following a profit warning. The losses raised the specter of class action lawsuits from investors saying they were misled by guidance.

The McGrathNicol report also finds that, among the companies that are offering guidance, the accuracy of their forecasts is falling rather than climbing as the researchers had initially expected. The percentage of companies whose earnings met or exceeded guidance this year fell to 64 percent from 69 percent last year.