What Would Happen if the U.S. Stopped Requiring Quarterly Earnings Reports?

President Trump has just asked the SEC to study the implications of moving to a half-yearly reporting deadline instead of the current requirement to file 10-Q forms on a quarterly basis. Over the years, I have heard from plenty of managers who have lamented that the pressure of quarterly earnings targets imposes a heavy toll on their ability to focus on the long term. Some of the managers actively advocate doing away with quarterly reporting. Opponents fear that banning quarterly reporting will not stimulate long-run investments nor will it end earnings management. Instead, they worry that managers will simply go from obsessing over smoothing out quarterly numbers to obsessing about smoothing half-year numbers. Moreover, twice yearly reporting would make companies less transparent. Some argue that such a change would have little effect simply because analysts would pressure firms to keep up reporting on a quarterly basis. Which of these narratives best reflects what would happen if the U.S. were to ban quarterly reporting? What unintended consequences might such a move entail?

These are speculative questions that are usually very difficult to answer. Luckily, we can learn from a similar experiment in the UK. In 2007, the UK required its firms to start quarterly reporting. However, the Financial Conduct Authority subsequently stopped requiring mandatory quarterly reporting in 2014. My co-authors and I studied these changes to see what effect they had. As always, the reality is nuanced and falls somewhere between the two extreme narratives. Moving away from quarterly reporting did not end corporate short-termism and earnings management, but nor did it destroy all transparency, leaving investors in the dark. Instead, here’s what we found happened when the UK started requiring quarterly reporting:

Firm disclosures: In 2007, when the UK mandated the start of quarterly reporting, they left the actual format of such disclosures up to individual firms. After the start of mandatory quarterly reporting in the UK, the number of firms that issued quantitative quarterly reports, defined as those with sales and earnings numbers, declined, suggesting a decline in disclosure transparency. However, the number of firms that issued annual earnings or sales guidance increased significantly. (Authorities left the format of disclosures up to the firm.)

Frequent reporting doesn’t lead to less investment. In the UK setting, after the imposition of mandatory quarterly reporting we found no change in company investments, measured as capital expenditures on plants, property, equipment, R&D, and intangible assets. Hence, getting rid of quarterly reporting is unlikely to mitigate corporate short-termism.

Frequent reporting increases analysts’ accuracy. Analyst coverage for UK firms increased after the introduction of more frequent mandatory reporting, meaning more firms had at least one dedicated analyst following its reporting. Analyst forecast error, defined as the difference between actually reported earnings per share and forecasted earnings per share, fell for firms after the introduction of mandatory reporting. These findings suggest that frequent reporting makes it easier for sell-side analysts to cover firms.

What about when the UK ended its quarterly reporting requirement? On November 7, 2014, the FCA published a new policy stating that firms were no longer required to publish quarterly management statements. Subsequently, a small number of the firms in our sample (only 9%) stopped quarterly reporting, possibly because they do not want to be perceived as bad apples with something to hide. Firms that did not provide earnings and sales guidance when the mandatory rule was in force and firms in the energy industry that had suffered a major fall in oil prices were more likely to stop quarterly reporting after the rule change. Firms that stopped quarterly reporting lost analyst coverage.

Proponents of banning quarterly reporting believe that such a ban will lead to less pressure on managers to issue earnings guidance. Remarkably, the UK evidence suggests that causality may actually run the other way. Firms that did not previously offer guidance were among the first to abandon voluntary quarterly reporting while firms that are committed to earnings guidance seem to be committed to quarterly reporting, regardless of what the law requires. In other words, contrary to claims by Warren Buffett, Jamie Dimon, and Larry Fink, not all earnings guidance is value decreasing. Firms tend to stop guiding when future earnings look weak or unpredictable (One other finding of note: Stopping quarterly reporting was not associated with increased levels of corporate investments.)

The crux of the issue is how to allow companies to balance the long-term goal of making productive investments without getting bogged down by short-term quarterly pressures. Following the UK’s example of making quarterly reporting voluntary would allow firms to make their own cost-benefit assessments as to whether the marginal loss in analyst following is worth the savings in cost and time. If banning quarterly reporting is indeed seen as desirable by shareholders, long-term owners will have to convince their key investee companies to give up quarterly reporting to prevent the perception that a firm has voluntarily stopped reporting because it has something to hide.

If nothing else, President Trump’s initiative might begin a much-needed conversation about how firms can move beyond simplistic quarterly EPS targets towards a deeper discussion with their stakeholders about their long-term plans for creating real value. Those discussions need to become more common, regardless of whether companies report quarterly or twice a year.