Why Trump need not worry about quarterly reporting of earnings
Quarterly earnings reporting ensures more information symmetry among institutional and individual investors
US President Donald Trump has asked the Securities and Exchange Commission to study a proposal to stop quarterly reporting and move to a six-month reporting system. Companies argue this would allow them greater flexibility and also result in cost savings. But the argument for ending quarterly reporting is a flawed one. In an era when even a country’s economic reports are quarterly, half-yearly reporting for companies seems like a backward step.
Supporters of ending the practice say it discourages long-term thinking, with the top management focused on meeting guidance or earnings expectations. But as Elon Musk, co-founder of Tesla Inc., has discovered, taking a company public means you have to embrace both the good and the bad.
Some investors have a long-term view, while others are focused on the short term. As long as the direction looks right, most investors have the sense to ignore hiccups in the short term and stay invested for the long term.
What are the advantages of quarterly reporting? It ensures that investors get to know about material events soon. A prolonged plant shutdown, the financial impact of litigation, or even a lost order—the financial impact of such events comes to light during quarterly results. Of course, one may argue that these should be disclosed even otherwise; but there are enough cases where material events and their impact have come to light only during quarterly results.
Quarterly reporting ensures more information symmetry among institutional and individual investors. The former have far greater access to companies, which will make individual investors even more disadvantaged if reporting is mandated only once in six months.
In India, there is another reason why quarterly results are important. The majority shareholder, the promoter, also typically controls the management. Quarterly results ensure that the minority is on an even footing, to the extent possible. Without quarterly results, events such as auditors refusing to approve financials or a big financial hole in the books would come to light much later.
Also, will getting three months more by shifting to semi-annual reporting make a dramatic difference to a company’s ability to think long term, or give its management more flexibility? That’s a bit difficult to believe. Consider what happened in the UK, which shifted to mandatory quarterly reporting in 2007 and then made it optional in 2014. A March 2017 research paper titled Consequences of Mandatory Quarterly Reporting: The UK Experience, by Suresh Nallareddy, Robert Pozen and Shivaram Rajgopal throws light on what happened (bit.ly/2BuK4lj).
The authors studied several effects. What’s relevant to this article is that mandatory quarterly reporting had “virtually no effect on investment decisions by UK public companies—as proxied by capital expenditure; levels of plant, property, and equipment; research and development; and intangible assets, in the UK setting”. And among the firms that shifted back to semi-annual filing in 2014, the authors found no significant change in their level of investments either.
If that’s the case, then why are managements so keen on doing away with quarterly results? Perhaps, their grouse lies with the earnings guidance that they are expected to meet every quarter. If that’s the case, then discard the guidance by all means. The market will still have a consensus earnings estimate, quarterly or annual. That’s inescapable and comes with being a listed entity.
If companies focus on their business and are able to communicate their long-term strategy clearly to investors, they can stop worrying about their share price in the short term. Maybe the right thing to focus on is what management compensation is tied to—financial performance and share price appreciation in the long term, or to more short-term targets. Maybe this needs a reset. When managements set quarterly, monthly or even weekly targets for their sales teams, expecting investors to grope in the dark for six months is a bit rich.