This survey serves as helpful data in beginning to answer the question of how much the analyst and asset manager community is driving short-term thinking in the markets through their actions and preferences for information.
CFA Institute conducted a survey of investment professionals in the United States on the issues of earnings and other guidance, communications, and incentives. The CFA Institute study ran concurrently with a similar survey of corporate officers and investor relations consultants that the National Investor Relations Institute (NIRI) conducted to uncover trends in guidance practices among firms.
Methodology
Over the period of two months, CFA Institute and NIRI staff jointly constructed the questionnaire, beginning with the reworking of the 2006 NIRI Guidance Survey questions so that they applied to investment practitioners, as opposed to firms. Several of the questions on each organization’s version of the survey are parallel, although both CFA Institute and NIRI had relevant questions that were asked only of their respective audiences.
The intended targets for the CFA Institute survey were members in the United States currently analyzing, following, and/or investing in companies. Targeted job functions or responsibilities included buy-side analysts, investment banking analysts/investment bankers, manager of managers, portfolio managers, research analysts, and sell-side analysts. The professional profile as self-identified by members in the CFA Institute database was used in an initial attempt to target these members. Two questions were added to the beginning of the questionnaire to further qualify respondents.
The survey was programmed online, and an e-mail invitation was sent out on 13 March 2008 to 16,000 members. Of those invitations, 15,997 were successfully delivered. A reminder e-mail to non-respondents was sent on 19 March, and the survey closed on 27 March.
Key Findings
The symposium series that led to the publication of the paper Breaking the Short-Term Cycle focused on a number of factors that contributed to the short-sighted approach of both companies and investors. One aspect of the short-termism cycle that everyone involved wished to address was the practice of giving quarterly earnings guidance.
Companies stated that such quarterly earnings expectations often made them feel excessive pressure to hit these numbers, or suffer consequences such as a decreased stock price, excess volatility, and possibly the loss of analyst coverage. They also stated that these expectations do not consider the long-term prospect of their companies.
Anecdotal evidence and academic studies confirmed some of these concerns, but what was originally unclear was where this pressure originated. Some symposium participants pointed the finger at hedge funds in particular, and the larger investment community in general, who were seen as increasingly pushing companies to hit quarterly earnings expectations. In the end everyone shares some culpability in perpetuating the short-term cycle that includes the practice of issuing, and then trying to meet, quarterly earnings guidance expectations.
We therefore asked CFA Institute members, who as investment professionals use financial statements, what measurements they use, which they prefer, and what type of guidance practice they see as best practices for the companies they analyze.
We found that although CFA Institute members do use quarterly earnings estimates, they use yearly estimates more often, and prefer broader measurements of corporate performance than quarterly earnings hits or misses. We also found that those on the sell-side use and prefer quarterly earnings estimates more than do financial professionals from the buy-side.