Cause and solution for what is going horribly wrong with the capital markets
Something has gone horribly wrong with the capital markets, and everyone seems to be baffled over the cause never mind the solution. Companies are being nailed to the wall for missing estimated earnings even by a penny. Their shareholders are seeing billions in market capitalization wiped out. And all too often blame is laid at the door of the investor relations department for failing to guide the market properly.
This shouldn't be happening. We're in an information age where more detail can be expressed more quickly than ever before. Through annual reports, 10Ks and 10Qs, investor conferences, analyst briefings, conference calls, IR web sites and investor briefing packages, investor relations officers are manning a writhing firehose spewing all kinds of data. Business schools, meanwhile, are shoveling out all manner of MBAs who supposedly have the acumen to analyze their way through the morass. Ascribing to a theory of efficient markets, this depth and democracy of information ought to result in a coolly ordered stock market. It doesn't.
Instead, out of this sea of numbers swimming in an ocean of intangibles, only two data points appear to count any more: estimated earnings and reported earnings. Any disparity between the two and whoosh goes the stock.
The consternation of IROs facing this stock price roller coaster is increasing. In another dimension of time and space, companies know at the beginning of the quarter precisely how much they will earn and investor relations officers guide the market's expectations. But on this plane of existence a company very rarely knows to a penny how much it will earn, and at the quarter's close it can see years of hard-won shareholder value evaporate.
One solution could be to replace the popularly reported consensus number with a range of estimates. Instead of hitting the tiny bull's eye of a penny or two, companies could aim for a wider target of five or ten cents.
Another option, though not a realistic one, would be for IROs to unanimously call a general strike on guiding earnings estimates. When analysts sit there with their elbows on a stack of corporate literature and demand to know if their estimates are on target, just shrug your shoulders and point to the documentation: 'You're the analyst. Do your job.'