A new study at the University of Nebraska–Lincoln sheds light on how external market pressures keep public companies locked into issuing quarterly earnings forecasts—a practice often criticized for encouraging short-term thinking over long-term growth.

Samuel Melessa, associate professor of accountancy, examined whether firms that provide quarterly earnings forecasts were compelled to continue out of fear that investors would lower their stock price if they stopped.

“This concern comes from the belief, and likelihood, that investors will interpret the discontinuation of the guidance as a signal of expected poor performance, even if the actual reason has nothing to do with that,” Melessa said. "If investors assume the company is hiding bad news, the typical market response is a drop in stock price."

Prior to the COVID-19 pandemic, companies discontinuing forecasts often faced stock price declines. However, the economic uncertainty of early 2020 created an unusual situation where firms could suspend guidance without alarming investors, as the pandemic disrupted normal financial forecasting for most firms.

In their paper, “Do Firms Get ‘Stuck” Issuing Quarterly Earnings Guidance?”, Melessa, Andy Call from the University of Southern California and David Volant from Indiana University, analyzed publicly traded firms that routinely provided quarterly earnings forecasts before the pandemic but suspended them in early 2020. They found that while 60% of these firms only temporarily stopped guidance during the crisis, 40% never resumed the practice even after conditions stabilized—more than three times the usual rate of firms per permanently stopping guidance.

“The firms that permanently discontinued guidance were those that prior to the pandemic saw fewer benefits and higher costs from issuing forecasts, yet continued providing guidance,” Melessa said. “These firms struggled to meet the forecasted expectations and had investors highly focused on quarterly earnings. They were exactly the types of firms that would want to exit the practice.”

Unlike firms that stopped guidance in the past and often saw their stock prices drop, those that used the pandemic as an opportunity to discontinue guidance performed well afterward. Melessa said this indicates that their decision to stop was not due to expected poor performance but rather a chance to escape a practice they felt pressured to continue.

“Our findings suggest that many firms get ‘stuck’ providing guidance because they fear negative market consequences if they stop,” Melessa noted. “The COVID-19 crisis temporarily removed this fear, allowing firms to reassess their disclosure strategies."

The researchers also found that by stopping guidance, companies also reduced the investor's focus on short-term earnings.

“Our research provides evidence on why so many firms continue issuing quarterly guidance despite calls from business leaders and academics to reduce short-term forecasting,” Melessa said. “Short-horizon guidance can lead managers to prioritize short-term performance over long-term value, and our findings suggest that firms may feel trapped in this cycle.”