President Trump has instructed the Securities and Exchange Commission to study the impacts of shifting corporate earnings’ requirements from a quarterly schedule to a semi-annual schedule. There are two theories behind the idea. First, that there is too much attention paid to the quarterly results and that management in turn is too short-term in its focus. The second part is that it cuts into productivity by compiling all the data four times per year.
I agree that investors and management alike have become too focused on having a company beat earnings estimates quarter after quarter. However, I would argue that if management is changing its long-term goals based on quarterly results, they probably aren’t very good managers in the first place.
As for investors being too focused on the short term, that is probably true for some and invalid for others. Long-term investors use the quarterly reports as a measuring stick of how the company is doing, and it is unlikely that they make their investment decisions based off of one quarter’s results. Short-term investors are just that, short term in thinking and they use the quarterly results as trading opportunities. A shift to semi-annual reporting would create trading opportunities, just not as often and that could cut into trading volume.
From the investment perspective, I don’t think it will help stocks overall. The idea of reporting on a quarterly basis is there to provide transparency between publicly traded companies and their investors. Shifting to semi-annual reporting will reduce that transparency and could have a huge impact on small-cap stocks and riskier investments.
Think about it, if a company only has to report every six months, how much will that reduce the average investor’s interest in investing in a riskier company? Take a company like Tesla. I wrote about Tesla a few weeks back and I consider it to be a very speculative investment. If you are invested in the company, do you really want to wait six months to find out how the company is doing? I know I wouldn’t. I want to know whether the cash burn rate is increasing or decreasing each quarter. I want to know if the production log jams are getting better or worse on a quarter by quarter basis.
My concern is that if the SEC shifts to a semi-annual reporting system, it will dampen investor interest in small-cap stocks and that could cut into innovation eventually. Sure companies like Microsoft and Apple will probably draw just as many investors with a semi-annual reporting system as they do with a quarterly reporting system. However, both of these companies were once small-cap, highly speculative issues that would have had a hard time attracting investors without the quarterly reporting system. The next Microsoft or Apple is waiting out there and it might not get the capitalization it requires if the appetite for riskier investments diminishes due to a change in the earnings reporting requirements.
Let’s shift our attention to the productivity aspect of the idea. I don’t doubt that shifting to a semi-annual reporting system would help companies in terms of increasing corporate profits ever so slightly. Just by reducing compilation of the financial statements from four per year to two per year would cut costs. It would have a small cost savings on things like paper, but it would have a much larger impact on labor costs as the number of man hours required to compile the reports would drop dramatically.
If a company’s profits increase, that doesn’t necessarily benefit the economy as a whole. Most companies don’t increase production just because its profits increased, they increase production when the demand for its products increases. It would likely mean an increase in stock buybacks and larger bonuses for management.
One possible negative impact is that it could create a reduction in employment. If a company has to produce quarterly reports and need X number of employees in the accounting and finance department to produce those quarterly reports in a timely fashion, they may not need as many employees to complete the reports on a semi-annual basis. Switching from a quarterly reporting system to a semi-annual system could lead to increased unemployment in the accounting field.
While I am all for increasing corporate profits, I am not a fan of the idea of changing from a quarterly reporting system to a semi-annual reporting system. The idea of reducing transparency between the company and its investors will have a negative impact on overall investment and especially with small-cap and higher risk investments. I also don’t like the idea of increasing unemployment just to increase corporate profitability. In the long run that will have a negative impact on corporate profits as fewer people employed inevitably leads to lower demand for goods.
I heard on Bloomberg last week that both Warren Buffett and Jamie Dimon, CEO of JP Morgan, have both mentioned they are in favor of switching to a semi-annual reporting system. I am going to venture a guess that they were speaking from a corporate management viewpoint more so than as an investor.
I don’t know any investor that wants less information about the company they are invested in. Of course, Mr. Buffett and Mr. Dimon have the power to call a company up and get any information they want in a matter of days, but small investors like you and me don’t have that power. The current SEC requirements are what give us some degree of power and ensure that companies share a minimum amount of information with all shareholders. Let’s keep it that way.