FSC to terminate earnings forecast requirement

By Michelle Hsu The China Post

Since its inauguration on July 1, the Financial Supervisory Commission (FSC) has announced several financial reform policies. In a meeting of its members held last Thursday, it reached another major decision that it would abolish the earnings forecast requirement on listed companies.

The new policy, scheduled to take effect on January 1, 2005, is applauded as a pragmatic move since the corporate earnings forecast has long been criticized as inadequate in reflecting the changing markets.

It was in the late 1990s when former Chairman of the Securities and Futures Commission Gordon Chen required listed companies to publish annual earnings forecasts, which as Chen claimed, should be a critical reference to investors. “Investors trade stocks primarily based on the growth potential of the companies, rather than their past performances,” Chen gave the major reason for the earnings forecast requirement as saying.

The corporate earnings forecasts actually have not made so much referential value to investors as Chen expected, mainly because there often appear either economic or non-economic factors to influence the market and corporate operations.

Unpredictable factors

Significant examples for this year are the revised monetary policy of the U.S. Fed to raise interest rates, the macroeconomic control policies of the Chinese authority to cool down the overheated economy in the mainland and the recent soaring crude oil prices on international markets. All have imposed significant influence on the global markets as well as the operations of individual companies.

The earnings forecasts were often criticized as misguided when companies overturned their previous predictions based on the latest changes in the market. Some companies were even charged for publishing inaccurate information in their earnings forecasts to manipulate their share prices.

To stamp out the mandatory earnings forecasts, however, worries some investors who used to refer to the corporate earnings forecast whenever they picked up shares from the market. Without the “official versions,” they would be confused with the different corporate analysis reports published by different brokerage houses. What’s worse is that such reports are often unavailable to the mass retail investors who account for nearly 80 percent of stock traders in Taiwan.

Stock manipulation

What worries the market regulatory agency most is the possibility that certain companies may put out inaccurate information to investors to entice them into buying their shares. While the mandatory earnings forecasts are about to be cancelled, the SFC would work out a package to encourage transparent information disclosure. “In case we find any company releasing misleading information on the market, the FSC will require the company to publish earnings forecasts every quarter to check if its operations match up with what it has told the investors,” said Lu Duang-yen, a member of the FSC.

Lu believes that the corporate analysis reports of the securities firms would become an increasingly important reference to investors when the listed companies do not publish their earnings forecasts.

Regarding the discrepancy among the corporate analysis reports compiled by different securities firms, Lu said that it would inspire securities firms to promote their R&D capability to raise the credibility of their research reports. “It will eventually help raise the quality of the market analysts in Taiwan,” he said.

To terminate the earnings forecast requirement, however, does not mean that listed companies could not offer their earnings forecasts. “For those companies to attempt to help their shareholders or the public strengthen their understanding of their operations, they can volunteer to offer their earnings forecasts regularly,” Lu stressed.