Google Case Write Up
Google has long been seen as a phenomenal company to invest in. Year after year the company continually performs well and gets returns for it investors. This also results in a very high stock price for the company which in recent years has become more volatile. The reason for this was because it periodically missed analyst’s forecasts when it came to items such as EPS. Some believe that because they have a no guidance policy that missing the analyst’s forecasts has the possibility of hurting the company’s value. Given that Google is beginning to expand again some believe that it is time to offer some earnings guidance for their investors.
Earnings guidance is simply forecasts issued by the company’s senior managers on a company’s earnings. There are a few advantages to issuing guidance. One, you can control market expectations to a certain extent. on average it appears that issuing guidance can alter a market’s expectations o future earnings, although, the reaction to bad news is generally higher than the reaction to good news. Most companies who have stopped issuing guidance have experienced more information asymmetry and an increase in forecast dispersion.
Even though guidance reports and meeting guidance reports can develop an image of transparency firms really have no control over the benefits of guidance. Opponents of guidance state that it has bad consequences since because of earnings management. For example, with EPS management has a lot of control over that number so companies can make sure they don’t miss their projected EPS.
It would seem that in the absence of guidance that investors might rely more heavily on analyst projections on how the company might be faring and they will invest accordingly. For example in 2007 Google’s profits fell short of analyst predictions. This resulted in a six percent drop in the company’s market value simply because they were off analyst projections.
According to one analyst it is very...
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