Keep quarterly reporting – Robert Pozen

From CFO

On August 17, President Trump waded into another complex area by a short tweet. He had apparently asked several top business leaders how to “make business (jobs) even better in the United States.” He then directed the Securities and Exchange Commission to study one business leader’s reply: “Stop quarterly reporting and go to a six-month system.”

Trump’s tweet reflects the belief of many corporate executives and commentators that quarterly reporting pushes public companies away from attractive long-term investments. However, the long-term benefits of semi-annual reporting are doubtful, while its costs are significant.

Shifting company reports to every six months does not meet anyone’s definition of the long-term. An extra three months to announce financial results would not induce American executives to take off the shelf the hypothetical stockpile of long-term, job-creating projects — now allegedly stymied by quarterly reporting.

For years, public companies like Amazon have achieved large market capitalizations by following long-term strategies, as investors waited patiently. Indeed, most biotechs go public successfully without any history of profits, so investors must be endorsing their plans for completing clinical trials and marketing their drugs.

Of course, the SEC could allow every public company to report their financial results with whatever frequency it chooses. However, that would make it very difficult for investors to compare companies in the same industry — a powerful tool for security analysis.Company executives who articulate a persuasive, multi-year business plan should not worry much about quarterly reporting. And if they are worried, moving to six-month reports will not help them.

The Evidence

Our position is supported by empirical studies of the United Kingdom and more generally. During the last decade, the U.K. twice changed its reporting requirements for public companies. In 2007, the U.K. moved from semi-annual financial reporting to quarterly reporting. Yet, there was no significant decrease in capital or research expenditures over the next 3 to 6 years, according to a study commissioned by the CFA Institute Research Foundation.

Then, in 2013, the U.K. reversed direction by replacing the quarterly with a semiannual reporting requirement. Yet the same study did not find any significant increase in U.K. company spending on capital investment or research after the change.

We recognize that investments in property, plant, and equipment are down throughout the developed world since 1990. But this trend includes those countries that rely more on banks for corporate financing and that have fewer public firms than the U.S. has. Indeed, America’s investment decline is less than that in the rest of the developed world.

Read the full post at CFO

Robert Pozen is a Senior Lecturer at the MIT Sloan School of Management. Mark J. Roe is the David Berg Professor of Law at Harvard Law School. 

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