Six months isn’t long term – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

Robert Pozen, Senior Lecturer, MIT Sloan School of Management

From Wall Street Journal

President Trump tweeted on Friday that he had directed the Securities and Exchange Commission to study a suggestion from a business leader, later revealed as outgoing Pepsi CEO Indra Nooyi: “Stop quarterly reporting & go to a six month system.” The popular theory is that quarterly reporting discourages firms from making long-term investments.

But switching to semiannual reporting wouldn’t help. Find us CEOs with stockpiles of good, long-term projects that they are not pursuing—but that they would, if only they had three extra months to report earnings. Reporting every six months is nobody’s definition of “long term.” Besides, investors have waited patiently as Amazon, Netflix and many biotech firms have followed long-term strategies.

In 2007, financial reporting in the United Kingdom moved from semiannual to quarterly. Yet capital expenditures and research-and-development spending didn’t fall significantly over the next three to six years, according to a study from the CFA Institute Research Foundation. When the quarterly requirement was ended in 2014, investment by U.K. companies didn’t change.

Across the developed world, investments in property, plant and equipment have declined since 1990. But in the U.S. the drop has actually been a few percent smaller than in other nations, including those without quarterly reporting. The most plausible conclusion is that reduced U.S. capital spending is caused by something else: the shift to capital-light and technology-oriented economies, or the rise of Asian manufacturing, or the weakness of the overall economy.

Moving to semiannual reporting would, however, have significant costs. If financial results were disseminated less frequently, investors would have a harder time assessing firms’ announcements and market changes. Stock prices would become less accurate. The temptation for insider trading would increase dramatically, since executives and advisers would possess nonpublic information for longer.

Read the full post on Wall Street Journal

Robert Pozen is currently a Senior Lecturer at MIT Sloan School of Management.

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