Quarterly or bi-annual: Will reducing financial reporting frequency help?

United States (US) President Donald Trump recently suggested that companies, subject to approval from the Securities and Exchange Commission (SEC), be allowed to report financial results on a six-monthly basis rather than quarterly. He reasoned that this would save money and allow company management to focus on running the business. Several individuals, including corporate leaders, share similar views and believe that companies are often entangled in the quarterly cycle, which hinders long-term thinking. In a joint 2018 piece in The Wall Street Journal, Jamie Dimon and Warren Buffett had argued that “... quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability”. Interestingly, following Mr Trump’s statement, the SEC chairman said the regulator would consider the change. 

What is good for US companies should also be good for companies in other jurisdictions. To get a sense among stakeholders in India, this newspaper conducted a dipstick survey and approached both companies and institutional investors. Perhaps unsurprisingly, 64 per cent of corporate leaders said six-monthly reporting would help reduce short-term pressure and allow them to focus on strategy. However, it is also important to consider the view of investors/ shareholders, for whose benefit quarterly reporting was introduced. Well over 70 per cent of top executives in asset-management companies preferred the current frequency of reporting. This again is not difficult to understand. Shifting to six-monthly reporting will impact investors and money managers in terms of assessing company performance. 

Besides, it is not certain that moving to a biannual reporting cycle will necessarily improve outcomes as Mr Trump and others suggest. A study of company earnings in the United Kingdom, done by the CFA Institute Research Foundation, found that the frequency of reporting did not materially affect corporate investment. It did not find any material reduction in investment when companies were made to report quarterly earnings in 2007. Similarly, when companies were allowed to stop reporting earnings quarterly in 2014, there was no significant increase in investment among those that stopped, compared with those that continued quarterly reporting. Thus, it is clear that the reporting frequency does not materially affect management decisions. Thus, changing it is unlikely to lead to gains for companies and eventually for shareholders. From the shareholders’ perspective, there are enough arguments in favour of continuing with the current system. 

Moving to a biannual reporting cycle will inevitably increase information asymmetry between management and shareholders, potentially leading to greater volatility in financial markets. Prices will be influenced more by speculative analysis than actual numbers. Further, company managers taking questions from investors/analysts every quarter helps them remain focused. It should not be a constraint on investment, as management can always explain the rationale. In a developing market like India, increased discourses and frequent reporting are crucial. It will help improve investor confidence and enable savings to be channelled into productive investment. Reducing the frequency of financial reporting is unlikely to benefit US companies, investors, or the economy. It will certainly not help a country like India.