Why scrapping quarterly earnings is a bad idea

When I was in college, some of my peers chose their courses at least in part because of the grading structure. Those confident they would keep up liked classes with midterm tests, regular papers and even weekly quizzes; procrastinators preferred a high-stakes final exam.

Now American corporate executives are on the verge of being offered a similar choice. The Securities and Exchange Commission has proposed scrapping mandatory quarterly reporting. Instead, public companies would only be required to file earnings reports with the watchdog twice a year.

SEC chair Paul Atkins said the “increased regulatory flexibility” is part of a broader programme aimed at reshaping the rules for listed companies and encouraging more initial public offerings. He is trying to reverse a decades-long slide in the ranks of public companies that some blame on increased reporting requirements.

Yet this particular proposal’s appearance as the leading edge of Atkins’ “make IPOs great again” agenda has at least as much to do with the chair’s boss as his deregulatory instincts. US President Donald Trump has hated quarterly reporting for years and called for it to be eliminated last September.

Indeed Atkins’s fellow commissioner Hester Peirce asked for investor feedback on whether it would make more sense to slim down the quarterly forms rather than making them optional.

When it comes to corporate reporting, I believe that it is generally a bad idea to give investors less information, and that is almost certainly what would happen here. Some companies will forgo quarterly updates entirely. Others may opt for shorter earnings releases that use “adjusted” profit and revenue numbers to emphasise management’s view while skipping SEC-required updates on potential risks.

Scrapping standardised quarterly filings would make year-on-year and company-to-company comparisons more difficult. Six-month gaps could also lead to greater share price volatility when information finally does come out. Furthermore, extending the period when managers have information that the rest of the market lacks could well inspire more improper trading.

Advocates of semi-annual reporting argue that it will free management to focus on long-term growth, cut compliance costs and send a message. The SEC has also substantially tightened disclosure rules in the 56 years since quarterly filing was first adopted, reducing its relative importance. Companies now have to reveal a long list of “material events” within four business days, and if they share non-public financial information with analysts or investors, they must also tell the market.

There may be cases where it makes sense to scrap quarterly reporting. A small biotech company whose main drug is still in the testing phase is not going to have a lot to tell investors until the results come back or the Food and Drug Administration weighs in. Does it really need to file a full report on its nonexistent earnings?

That said, most US companies should think twice about taking the SEC up on its offer. The financial savings, for most companies, from semi-annual filing are relatively modest — an average of $198,000 a year, the SEC estimates. Managers may resent the time they spend on earnings preparation and delivery, but quarterly interactions with investors help build market awareness — and confidence.

When Israel allowed smaller companies to drop quarterly earnings in 2017, groups that did so were hit on average with a 2 per cent share price fall when they made the announcement, while those that kept quarterly reporting saw shares rise 2.5 per cent. Dropping down to semi-annual reporting “is a signal that you have no controls over corporate governance”, says author Keren Bar-Hava of Hebrew University.

In the UK, a CFA Institute study found that companies that report four times a year attracted increased analyst coverage and, not surprisingly, those analysts’ estimates were more accurate.

Just as it would be foolhardy to pick courses solely to indulge a penchant for sleeping in, US corporate executives should look beyond their own convenience. Harvard law professor Jesse Fried suggests that companies that want to stop filing quarterly be forced to put the move to a shareholder vote, but that is not part of the SEC proposal.

One can only hope that US chief executives take a lesson from their British counterparts. When the UK allowed companies to drop quarterly reporting in 2014, fewer than 10 per cent of them did.

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Cover image: Angela Weiss/AFP/Ritzau Scanpix