After more than half a century of quarterly reporting, listed companies in the US might soon see a change to their reporting schedule if President Trump and the chairman of the Securities and Exchange Commission get their way.
Their view is that having to report every three months makes companies focus on short-term results and stifles innovation.
The move has support from the corporate world. Ryan Lockwood, CFO at Carparts.com, an e-commerce provider of automotive parts and accessories, reckons it would reduce the regulatory burden and free up time to spend on strategic initiatives.
“As a CFO I would love less reporting so my team could focus on the business and less on repetitive compliance work,” he says. “As a former portfolio manager and investor, I think this would force investors to also think longer term. At my old firm we would ask ourselves ‘if we bought this stock and the market stopped trading for 20 years, would we still want to own it when it reopened?’.
Srini Krishnamurthy, Associate Professor of Finance at Poole College of Management says the current regime may encourage firms and their managers to focus on quarterly performance rather than think more long-term and refers to research questioning whether financial statements accurately depict a firm’s financial performance.
His own research on firms forced to restate earnings shows their initial earnings reports were inflated upwards using high levels of accruals.
“Collectively, this evidence shows that quarterly financial reporting and its outsized impact on stock prices can incentivise firms to manipulate their financial statements,” he says. “In turn, this distorts the market’s assessment of firm performance and lowers the value relevance of financial statements.”
David Katz, Chair of the Board of Advisors of the NYU Law Institute for Corporate Governance and Finance says revising the mandatory reporting schedule would be a step in the right direction while recognising that it would not on its own remove short-termism from capital markets or reverse the long decline in the number of public companies in the US.
Proponents of six-monthly reporting note that the EU and the UK shifted from quarterly reporting in the last decade. But it must also be acknowledged that many European multinationals still produce quarterly reports, primarily to satisfy stockholders keen to keep an eye on the performance of their investments.
Shivaram Rajgopal, Kester and Brynes Professor at Columbia Business School says his study of UK listed companies found that the 10% of firms that stopped quarterly reporting lost analyst coverage as analysts tend to report to their clients around earnings announcements.
It also found that investment patterns – measured as R&D, capital expenditure and M&A – did not change for firms that stopped quarterly reporting.
Rajgopal notes the average CFO tenure in the US is just four years while investment initiatives typically take five to six years to produce results. “Unless we can somehow change CEO and CFO tenures, tinkering with reporting frequency will do little,” he says.
Charles Stanley’s Chief Investment Commentator, Garry White, agrees that while the proposal may appeal to corporate leaders seeking regulatory relief, the UK’s experience suggests the benefits may be overstated – and the risks to market confidence, investor protection and corporate accountability should not be underestimated.
