An October 8th post on the Harvard Law School blog highlights the foolishness of the idea of switching from quarterly to semiannual reporting for public firms. Well-known academics Robert C. Pozen and Mark Roe analyze the pros and cons of a switch to semiannual reporting, and conclude it is definitely not a good idea given notable disadvantages and few real benefits.
A switch to semiannual reporting offers few benefits and many drawbacks
While there are certainly reasonable concerns about short-term thinking in the corporate world today, there has recently been a great deal of discussion about eliminating the requirement for quarterly earnings reports from public firms. The argument is that quarterly reports cause management to pass up long-term projects to meet the expectations of investors and traders who demand rising earnings from quarter to quarter.
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Of note, the U.K. recently eliminated the requirement for quarterly reports to try and increase the time horizon for business decision-making. Marty Lipton, a very wealthy and well-known U.S. corporate lawyer, has proposed that U.S. firms be allowed to choose whether they want semiannual or quarterly reporting. The same theme has been focused on by Democratic presidential candidate Hillary Clinton, who has criticized “quarterly capitalism,” as has Daniel Gallagher, the recently retired Republican SEC commissioner.
According to Pozen and Roe, however, “while quarterly reporting has drawbacks, the costs of going to semiannual reporting clearly outweigh any benefits.”
They argue that the primary “benefits” from replacing quarterly with semiannual reporting are dubious. They note: “Do we really believe that moving from quarterly to semiannual reporting will bring forth many new five-year investment projects? Similarly, without quarterly reporting, why won’t earnings smoothing just occur in six-month intervals instead?”
Pozen and Roe also point out that with semiannual reporting, earnings will almost inevitably move further away from management’s projections in six months instead of three, providing firms with yet more reason to smooth earnings semi-annually. The biggest and most problematic issue with companies not reporting for six months is that the gap between inside information and public information will widen, which could very likely lead to an increase in insider trading.
Moreover, quarterly earnings reports are valued by stockholders and analysts for current information on firms. Given the importance of financial reporting for investors, letting each firm decide when to report its earnings would clearly undermine the efficiency of American capital markets. Just think about it — if Delta Airlines reports semiannually, but Southwest doesn’t, it suddenly becomes much mire difficult to accurately compare firms in an industry.
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