US regulator backs less frequent corporate reporting: why it matters

The US has moved one step closer to potentially the biggest change to corporate reporting rules since the 1970s.

Donald Trump called for quarterly reporting to move to twice-yearly during his first term as US president, and again last September. Now, the regulator has done the same and made a formal proposal to reduce the frequency of reporting.

This has major implications for anyone putting money into the markets as it could affect trading volumes and lead to corporate leaders and investors making decisions based on a longer-term outlook rather than the short-term.

The Securities and Exchange Commission (SEC) has published its proposals, and the public has until early July to give feedback. Importantly, the SEC is giving companies the choice of how frequently they report – they can change to semi-annually or continue reporting quarterly.

How long has the US system been in place?

US companies have reported earnings every three months under a system that has been in place for 56 years. Advocates argue this frequency of information keeps investors up to date on what is happening with a business, thereby helping them to make informed investment decisions.

Quarterly results have been major catalysts for share trading, with investors often guessing how the results might play out and taking positions ahead of the numbers. Once published, the quarterly results then spurred another bout of trading as investors digested the figures and management commentary. This news flow fuels momentum in the market and supports liquidity, particularly among larger companies.

Was there a problem in the first place?

One might argue the current system runs like a well-oiled machine, with the recent new record highs of the US stock markets proof there is nothing wrong with the current setup. Information flows freely, and investors feel informed enough to decide whether to take the risk of owning certain shares or not.

So why has the quarterly reporting system often been criticised? It is no mean feat putting together a set of reports and accounts every three months – that takes up management time both before the event, and afterwards when they get questions from investors, analysts, and journalists.

There is a worry that certain company executives have chased short-term wins just to hit quarterly targets, making decisions that might not be in the best interests of their company longer-term.

Three months is a brief period on which to judge performance. No company will prosper every single quarter, and so investors often panic if they suddenly see three months’ worth of trading not going as well as before.

There is also the issue of information management. Investors can feel overwhelmed at certain points in the reporting cycle. For example, it is typical to see the world’s biggest companies by market value report results on the same day, or hundreds of large cap names squeezed into the same reporting week. The need to shoehorn large-scale stock analysis into a brief period affects both individual investors and fund managers.

The UK model

Investors in the US might wonder if a semi-annual reporting schedule works. Experience from the UK would suggest it does. The UK mandated quarterly reports in 2007, with an interim management statement at the first and third-quarter stages, only to then scrap this requirement in 2014.

A research paper from the CFA Institute Research and Policy Centre in 2017 found that barely 10% of UK-listed companies stopped reporting on a quarterly basis when they had the chance. Today, it is common for investors to get trading updates between half-yearly results, albeit the level of information ranges from highly detailed information to sometimes just a single line.

US companies might argue they do not want to report less frequently. Certain leaders might worry doing so would imply they are trying to hide something, which could affect investor sentiment and weigh on their share price.

New rules could drive up IPO volumes

Relaxing the rules around reporting might encourage more companies to list on the US stock market. It would play into a trend seen on both sides of the Atlantic to stop companies from staying private. However, looser rules do not always end well.

Critics of Donald Trump might argue he is pushing a broader deregulation agenda at the worst time in the market cycle. A bull market when making money seems easy is often the point of maximum damage.

Bull markets end when the money runs out, and one contributory factor to the bursting of the tech, media, and telecoms (TMT) bubble of the late 1990s was a tidal wave of primary and secondary offerings that simply overwhelmed investors.

Trump is clearly a fan, the SEC’s proposal means the regulator supports the initiative, and the plan has the backing of the American Securities Association, which represents wealth managers and regional financial services companies. Time will tell if changing the reporting rules is the right decision.

There is much to take in, and the debate for and against will gather pace once the SEC makes a final decision.

Past performance is not a guide to future performance and some investments need to be held for the long term.