Recently the SEBI chief was quoted saying that exempting
companies from declaring 1QFY21 results by allowing them to combine 1QFY21 and
2QFY21 will be detrimental to the interest of investors. He reportedly said
that "Without companies declaring their results for a quarter, investors,
financial analysts and media might make their own estimates about companies'
earnings, which could be less reliable and speculative".
If this is really the thought process of regulator than it must
be a cause of worry for all, especially investors. A regulator laying so much emphasis
on quarterly earnings of companies highlights the adhoc nature of our
regulatory framework for the market.
It is pertinent to note that financial analysts and media do
make their own estimates much before companies declare their results. The companies'
performance is widely reported and evaluated by analysts and media in
comparison to these estimates. The tone of the reporting is always that the
company "missed" or "beat" the estimates of analysts or
media. I have never seen an analyst or TV channel admitting that their
estimates about companies' earnings or monthly sales data were wide off the
target.
There is enough empirical evidence to guide the regulator that
the practice of releasing the estimates of quarterly earnings and monthly sales
numbers causes undue volatility in stock markets and often leads to mispricing
of stocks. Despite many representations, the regulator has not considered
making it compulsory for analysts and media reporters to explain the
divergences between their estimates and the actual performance of the company
besides incorporating the historical divergences in their reports. It would
help the investors in determining how much reliance they may place in these
estimates.
In recent years, with the advent of numerous professional
"investor relation" service providers, a large number of companies
have started the practice of scheduling analyst presentations, conference calls
and media interactions after announcing quarterly results. These calls and
presentations are attended by a large number of people. My interaction with
many analysts and investors indicates that the statements and projections made
by the companies' managements in these interactions usually influences the
analysts' forecasts and investors' decisions. While the regulation requires the
companies to intimate the stock exchanges about all such scheduled interactions
in advance; there is no regulation that requires the management of companies to
explain the divergences between their forecasts and actual performance. Consequently,
in a buoyant market environment like the present one, it is common to see
managements of poorly managed companies to make wild forecasts palpably to
influence the prices of shares of their respective companies.
A survey conducted by McKinsey & Co. many years ago,
suggested that there is no clear consensus on contribution of the practice of
issuing frequent earnings guidance to the value of companies; though they did
feel that their company’s coverage by analysts and hence its visibility would decrease
if they stop giving earnings guidance. A majority of participants responded
that most managements issue earnings guidance largely at the insistence of
brokerage house analysts, particularly the sell side analysts. A majority of
respondents believed that issuance of earnings guidance does help in
maintaining a channel of communication with investors and intensifying the
management's focus on achieving financial targets. Though many participants did
also feel that it causes share price volatility and excessive trading. The
practice is also found to be leading the companies to focus more on short term
goals.
The regulator should have felt relieved on receiving request
from companies for not issuing quarterly numbers, rather than getting perturbed
and denying the markets a much needed breather.
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