Two camps are emerging in a heated regulatory debate over the frequency of revenue reporting.
Can publicly traded companies ever disclose their earnings to investors too much frequently?
This issue has divided financial regulators in recent years. In 2018, the Trump administration asked the United States Securities and Exchange Commission (SEC) to consider reducing the frequency of earnings disclosure requirements for public companies to a semi-annual basis from the current quarterly system. The SEC study that responded to this request has sparked debate among investors, lawyers and regulators about securities disclosure rules, though it has yet to result in changes in the frequency of disclosures. required filings of results reports.
The SEC has required public companies to report quarterly earnings in a standardized way since 1970. Quarterly reporting, however, dates back to the Securities and Exchange Act of 1934, which required periodic disclosure for publicly traded companies, such as the New York Stock Exchange.
In undertaking the study suggested by President Trump, the SEC sought comment on the matter. Eventually, in 2020, the SEC adopted new “principles-based” disclosure rules in an effort to tailor specific disclosure categories to industry needs, the first major change in more than 30 years. However, it made no changes to the frequency of the disclosure requirements.
Current SEC Chairman Gary Gensler removed a planned regulation on quarterly reporting from the agency’s regulatory agenda in 2021, signaling the end of the SEC’s exploration of reducing the frequency of disclosures.
But industry groups, such as the US Chamber of Commerce’s Center for Capital Markets Competitiveness, have urged the SEC to assess the effectiveness of the current disclosure regime. In the past, the group has argued that investors are “inundated with information” and would benefit from limiting “extraterrestrial” disclosures, which would result in better market discipline and more efficient capital allocation.
Some legal and business scholars have agreed that the SEC should rethink the frequency of quarterly earnings, arguing that “it’s unclear whether investors would really be worse off” under a semiannual reporting regime. Other experts say, however, that limiting the frequency of earnings releases could work against, rather than for, investors.
The SEC received nearly 100 comment letters after its 2018 filing expressing a range of views. Two main camps have emerged: those who oppose quarterly results because they believe the high frequency of disclosure leads executives to make decisions that only benefit in the short term, and supporters of quarterly reports who believe that investors need frequent transparency to make informed choices.
Opponents of quarterly earnings releases dispute the encouragement of short-term thinking driven by more frequent reporting. They argue that “short-termism” — the idea that public companies eschew long-term investment and earnings in favor of a short-term increase in quarterly earnings — hurts investors. Critics say that in response to more frequent disclosure, executives are cutting long-term productive investments, such as research and development, that would benefit investors and society.
Some researchers also worry that managers are engaging in “accounting tricks” to manipulate reported earnings and reduce quarterly fluctuations. They found that private companies not subject to quarterly earnings disclosure were “more sensitive to changes in investment opportunities” than their public counterparts. The “comparable public companies” studied were even less responsive when these companies belonged to sectors whose stock prices reacted more strongly to quarterly earnings releases.
But proponents of quarterly earnings disclosures argue that the main proponents of decreasing the frequency of earnings disclosures are companies rather than investors. These proponents, which include Wall Street watchdog Better Markets, acknowledge the problem of short-termism but believe the problem could be solved by aligning executive compensation with long-term goals. For example, the SEC could require companies to change their incentive structures to ensure managers don’t receive bonuses for quarterly fluctuations in reported earnings.
Still, forcing investors to rely on half-year earnings would remove a layer of transparency, some researchers warn. A study also found that in the absence of quarterly earnings reports, investors overreact to other forms of information that may not be indicative of a particular company’s earnings.
Skeptical of reducing earnings disclosure, some other researchers argue that the problem with short-termism lies in earnings projections rather than earnings disclosure. Public companies are currently not required to publish projections. But UCLA Law School professor James Park found that transparency between investors and companies could be fostered by requiring companies to disclose their projected earnings each quarter and the assumptions behind those projections. Investors would then be less reactive to swings in quarterly earnings, removing incentives for companies to seek short-term impulses, Park argues.
Removing quarterly earnings disclosure requirements is not a new idea. The European Commission made the change in 2013, although European companies listed on US stock exchanges are still required to publish quarterly information.
In addition, research indicated that when the UK moved from half-yearly to quarterly reporting in 2007, there was no change in long-term investments by public companies.
Some researchers say the answer lies not in a standardized reporting frequency for each company, but in a bifurcated reporting system based on a company’s industry and purpose. In a comment letter to the SEC, academics from Brown University proposed a bifurcated reporting system that would require small companies to report only twice a year, coupled with a focus on encouraging guidance. less stringent in terms of earnings per share.
This framework would allow smaller companies that may be more inclined to shield their earnings from quarterly fluctuations to make more substantial long-term investments without risking an overreaction from the market to higher capital expenditures as a percentage of revenue, the authors of the report suggest. Brown report.
The high level of debate surrounding the quarterly earnings issue indicates that the issue of reporting frequency may one day return to the SEC’s action list. Until then, publicly traded companies continue to report earnings on a quarterly basis.