Companies in the US have been used to reporting to their shareholders and investors once a quarter since the 1930s. So it's ironic that, just as the automation of financial reporting mechanisms has raised the potential for company reports almost on-demand, President Trump has shown his support for a lengthier, twice-yearly reporting model. Which reporting model is of most benefit to shareholders and the financial teams that produce financial reports?
Trump's statement not that outrageous
On 17 August, US President Trump showed his support for reducing the frequency of financial reporting, from quarterly to every six months. He stated that this would “allow greater flexibility & save money” and he has asked the Securities and Exchange Commission (SEC) to look into this.
Some of the comments in response to the President's tweet were critical, expressing concern that abandoning quarterly reporting would lead to less transparency and accountability of companies to their shareholders. And experts in business law also fear that moving to a six-monthly reporting model “could have significant downsides, including a greater temptation for companies to cover up missteps and an increased potential for insider trading”. However, David Zaring, Wharton professor of legal studies and business ethics, and Georgetown University Law Center's Donald Langevoort, also point out that, potentially, shareholders may not actually be worse off if companies publish half-yearly reports if they are also disclosing material and price-sensitive information as and when it occurs. That said, Langevoort is clear: the potential problems arising from a switch to a half-yearly reporting mode outweigh the benefits. But Zaring thinks there is a strong argument in favour of twice-yearly reporting and that “the SEC should seriously consider Trump’s proposal given the substantial push for a change in reporting frequency”.
In line with Europe?
Unlike some of the President's other suggestions, a twice-yearly financial reporting model for public companies is not so outrageous. The UK requires companies to report twice a year. Although it moved to a quarterly reporting requirement in 2007, it then returned to the half-yearly requirement in 2014 and is now in line with Europe. Interestingly, Langevoort points out that “companies in the UK and Europe continued to put out quarterly reports, egged on by investors, analysts and portfolio managers”. So it seems that the market prefers and demands formal disclosure once a quarter, not twice a year. And Zaring also notes that investors prefer standardised reporting requirements rather than voluntary models, ruling out a system of voluntary reporting.
So what are some of the benefits that could come out of a less frequent financial reporting model? Here is a summary of some of the key arguments on both sides:
Benefits of twice-yearly reporting:
- Companies could save on the costs of accounting, legal, filing and other costs.
- Companies would have more time and resources to focus on longer-term growth rather than working with quarterly earnings reports constantly in mind.
- It hasn't been proven that investors would actually be worse off if they got information on the performance of a company only twice a year.
- The pressure to report earnings every quarter prompts companies to constantly manage their numbers to meet Wall Street expectations.
- The focus on quarterly results has given rise to artificial stock price manipulations such as unusual share buybacks, non-strategic cost-cutting, less investment in longer-term basic and applied research and an unhealthy pressure on labor costs.
- Companies have to keep investors informed of important events that could move stock prices, such as market-moving information and Fair Disclosure data.
- Without the pressure of quarterly reporting, more privately held businesses might also want to go public.
Downsides of twice-yearly reporting:
- Moving to a twice-yearly model from a four times a year model wouldn't necessarily move focus onto real long-term growth, as companies are still focusing only six months out.
- Investors need access to timely information about new risks to the company and a quarterly formal report provides that.
- Quarterly reporting also helps build trust between shareholders and the company's CEO and management.
- Less frequent formal disclosure could result in less transparency and, in effect, data going unreported for a longer period of time, which could be an environment in which insider trading activity could take place.
- With less frequent earnings reports, investors might turn to alternative information sources, which could mislead them into overreacting or under-reacting.
- Academic research shows that more transparent and timely information reduces the benefits of private information, and reduces insider trading, specifically.
- Quarterly reporting strengthens the position of the US capital markets, which are currently considered liquid and safe – a move to twice-yearly reporting could affect the perceived transparency of the US financial markets.
- Semi-annual reporting means that investors have less information than the company's executive team. Investors may therefore be less confident to trade, which could reduce liquidity and open the door for corporate malfeasance.
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