I don’t often disagree with Warren Buffett, but his position on companies providing guidance was one example. In a previous post, I argued that the more information companies give investors, the more accurately they will price stocks, on average. Perhaps there will be instances where investors might over- or under-react to certain information releases, particularly if it is vaguer information like guidance. But that possibility should not make executives the paternalistic managers of investor sentiment.
The problem is a good deal worse if companies decide to withhold value relevant historical information as Apple has now decided to do regarding the number of units it sells. Withholding that information clearly makes it more difficult for investors to value Apple accurately. Remember that the fundamental social role of the stock market is to move funds from savers to investors. That task requires accurate pricing so that funds are allocated to the companies with the best opportunities. If companies withhold information and pricing becomes noisier, the capital allocation process is impeded, and everyone loses.
Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Energy, Climate Change and Finance. Professor Cornell received his Masters degree in Statistics and his PhD in Financial Economics from Stanford University. In his academic capacity, Professor Cornell has published more than 125 articles on a wide variety of topics in applied finance, particularly empirical analysis of asset pricing models. He is also the author of Corporate Valuation: Tools for Effective Appraisal and Decision Making, published by Business One Irwin, The Equity Risk Premium and the Long-Run Future of the Stock Market, published by John Wiley and Conceptual Foundations of Investing published by John Wiley. He is a past Director and Vice-President of the Western Finance Association and a past Director of the American Finance Association. As a consultant, Professor Cornell has provided testimony and expert analysis in some of the largest and most widely publicized finance related cases in the United States. Among his clients are AT&T, Berkshire Hathaway, Bristol-Myers, Citigroup, Credit Suisse, General Motors, Goldman Sachs, Merck, Microsoft, Morgan Stanley, PG&E, Price Waterhouse, Verizon, Walt Disney and various agencies of the United States Government. Professor Cornell is also a senior advisor to Rayliant Global Investors and to the Cornell Capital Group. In both capacities, he provides advice on fundamental investment valuation. In his free time Prof. Cornell enjoys cycling and golf.
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