On August 17, President Trump waded into another complex area by a short tweet. He had apparently asked several top business leaders how to “make business (jobs) even better in the United States.” He then directed the Securities and Exchange Commission to study one business leader’s reply: “Stop quarterly reporting and go to a six-month system.”
Trump’s tweet reflects the belief of many corporate executives and commentators that quarterly reporting pushes public companies away from attractive long-term investments. However, the long-term benefits of semi-annual reporting are doubtful, while its costs are significant.
Shifting company reports to every six months does not meet anyone’s definition of the long-term. An extra three months to announce financial results would not induce American executives to take off the shelf the hypothetical stockpile of long-term, job-creating projects — now allegedly stymied by quarterly reporting.
For years, public companies like Amazon have achieved large market capitalizations by following long-term strategies, as investors waited patiently. Indeed, most biotechs go public successfully without any history of profits, so investors must be endorsing their plans for completing clinical trials and marketing their drugs.
Company executives who articulate a persuasive, multi-year business plan should not worry much about quarterly reporting. And if they are worried, moving to six-month reports will not help them.
Of course, the SEC could allow every public company to report their financial results with whatever frequency it chooses. However, that would make it very difficult for investors to compare companies in the same industry — a powerful tool for security analysis.
Our position is supported by empirical studies of the United Kingdom and more generally. During the last decade, the U.K. twice changed its reporting requirements for public companies. In 2007, the U.K. moved from semi-annual financial reporting to quarterly reporting. Yet, there was no significant decrease in capital or research expenditures over the next 3 to 6 years, according to a study commissioned by the CFA Institute Research Foundation.
Then, in 2013, the U.K. reversed direction by replacing the quarterly with a semiannual reporting requirement. Yet the same study did not find any significant increase in U.K. company spending on capital investment or research after the change.
We recognize that investments in property, plant, and equipment are down throughout the developed world since 1990. But this trend includes those countries that rely more on banks for corporate financing and that have fewer public firms than the U.S. has. Indeed, America’s investment decline is less than that in the rest of the developed world.
Thus, it’s a mistake to blame quarterly stock market reporting for reduced capital spending. Something else is operative — factors such as the movement to capital-light, technology-oriented economies; the rise of Asian manufacturing; and the weakness, until recently, of the economy overall.
While we don’t believe that moving to a semi-annual reporting requirement would be beneficial, we do oppose the common practice of quarterly earnings guidance — when companies announce what they expect their earnings will be in the next quarter. Having put their reputations on the line by projecting earnings for the next quarter, some executives then scramble and distort their company’s businesses to avoid reporting earning anything less.
But earnings guidance is optional, not required by the SEC, so companies could break this bad habit on their own, without a new or amended SEC rule. The practice of publicly predicting earnings has come under growing criticism, including a recent op-ed by Warren Buffett and Jamie Dimon. We note that Buffett and Dimon did not recommend doing away with quarterly reports.
Moving from quarterly to semiannual reporting would also have significant costs. With corporate results disseminated less frequently, stock prices would be less accurate as investors struggled to assess the financial effects of material developments without the company’s numbers. Small bits of public information loom larger in stock price valuations when investors are in the dark as to the actual earnings implications of such bits.
When the SEC went from a semiannual to quarterly reporting requirement between 1955 and 1970, the cost of equity capital went down for U.S. public companies, according to a definitive empirical study. This result strongly suggests the investors highly value more frequent reporting because it reduces the risk of buying stocks based on currently available information.
Moreover, if results of U.S. companies were hidden for longer periods, more people — executives and advisers — would possess nonpublic information. The temptation and potential for insider trading would rise substantially.
A Better Reform
But as any public firm CFO knows, putting together a 10-Q is an arduous task, competing for time and resources that could be better spent elsewhere. While we believe that abolishing quarterly reports is unwise, the SEC should streamline quarterly reports — which now are too dense and long. Companies spend too many hours and dollars putting together what has become a thick tome that repeats too much old information.
For example, the SEC could require full company reports only at the end and middle of the fiscal year. In the two other quarters, company disclosures could be limited to their financial statements plus a concise summary of material developments since the last full report.
In addition, quarterly filings on form 10-Q arrive too late at the SEC — 7 to 10 days after a company issues a short press release summarizing its quarterly revenues and earnings. That press release is extensively discussed in an open conference call hosted by management for investors, who quickly respond to that information.
The SEC should therefore try to integrate those press releases with its quarterly filing requirements. Most investors read these timely summaries and trade in reaction to them, rather than the quarterly tomes later filed with the SEC. The appropriate direction is to coordinate the earnings releases with the 10-Qs to cover, in a timely manner, the important information for investors without undue repetition.
Such a reform agenda at the SEC would be more useful than pursuing the pipe dream of increasing long-term investments by shifting from quarterly to semiannual reporting of company results. Six months simply does not constitute the long term.
A shorter form of this column originally appeared in The Wall Street Journal.