The public markets are governed by rhythm. If the beat is changed, then prices will move in a different direction.
The SEC has hinted at a possible change as the US administration pushes for a loosening of reporting requirements.
It sounds like a simple proposal. The proposal aims to reduce noise surrounding earnings seasons by replacing mandatory quarterly reporting.
Both sides have made strong arguments.
What’s actually going on?
Donald Trump has revived an old debate when he urged companies to switch from a quarterly reporting cycle to one that is six months long.
Under the leadership of Paul Atkins, SEC is prioritizing an initiative that makes frequency optional.
It is being sold as a rulebook with fewer requirements and lower costs. This is also the beginning of a new era for Gensler, which will be characterized by a less aggressive stance towards issuers as well as a lower emphasis on disclosure requirements.
The Exchanges has expressed support for the optionality of quarterlies, but not an outright prohibition.
Investors warn of the dangers that there are fewer checks, which means more information gaps for those who know what is going on.
Since 1970, quarterly reporting is a standard. The purpose of the system was to provide frequent and comparable GAAP data, as well as to serve to anchor prices.
It does more than just fill up calendars. The cadence determines how frequently the market can adjust a narrative using audited-style numbers and management discussions.
The information network of the market will also change as the frequency changes.
Can frequency affect investment behavior?
Quarterlies are said to encourage short-term thinking and make records thinner.
Studies found that firms who switched to half-year updates from quarterly reports did not experience any increase in research or capital expenditure.
Companies in the United States have been funding long-term projects and reporting quarterly. Big Tech invests vast sums in artificial intelligence infrastructure, with returns measured over years.
As a rule, energy majors invest in multi-year wells and refineries.
In the modern quarterlies era, corporate investment has always been a strong share of GDP.
Pressure is felt elsewhere. The act of reporting is not as important to managers’ behavior than quarterly guidance.
The target earnings per share creates powerful incentives for smoothing results through buybacks, trimming discretionary spending, and pulling forward revenue.
The theater of the earnings season is shaped by guidance, and the rush to achieve a precise prediction magnifies.
Investors can test their claims using standard statements by reporting.
It is clear that the evidence suggests a need to reconsider guidance practices, rather than dimming disclosure.
Can international comparisons be useful?
Only when viewed in context are they useful. In Europe, reporting is usually required every two years.
Investors and lenders still prefer quarterly updates, which many large European companies continue to publish.
Mainland China requires quarterly reporting. Hong Kong requires semi-annual reporting. Taiwan demands that monthly income prints be submitted to prevent fraud.
It is unfounded to claim that China reports less and invests more because they report longer.
The state, credit policies, and subsidies are the main drivers of Chinese investment.
Overbuilding, overcapacity and lower margins for listed companies than the United States are all results.
This result was not achieved by frequency. Industrial policy did.
US Premium has been based on disclosure, depth and enforcement.
Confidence in the system of information and its rules is the reason for the narrow spreads and low capital costs. If you reduce the frequency of reporting, the market will not crash. The market reprices.
The equity risk premium will be a few basis points higher for companies who pull back.
When data drops, reduce the amount of coverage on the sell-side. When results fall, a larger step-function move is made.
It is a gradual but persistent effect, which has the greatest impact on smaller companies.
How a more intelligent reform might look
Real costs can be reduced without compromising light. Accounting constraints are clear.
It is impossible to re-measure accruals each month for accounts receivables, obsolescence of inventory, and contingencies, without a large risk and error.
Simple operating telemetry can be published at a low price. The KPIs could be presented in a machine-readable, thin sheet each month to give signals without forcing investors into a complete close.
Templates can be based on sector. Retailers may publish sales data and traffic.
The software can show the annual revenue, revenue retention and churn.
Automobiles can post their order books and deliveries. Semiconductors may publish their backlog of orders and the equipment they have ordered.
No glossy narrative. Earnings per share are not required. Do it in XBRL, and provide it as a simple document.
A once-a-year limited assurance on definitions and system would be helpful to keep numbers accurate.
This ensures the MAU is the same in both January and June, and the churn calculation across all quarters. Combine this rule with one that triggers.
The company will provide a brief interim report when revenue or EBITDA exceeds a band defined from its last reported run rate.
This reduces the chance of a six-month air pocket where fundamentals are shifting but the market is still blind.
With longer blackout periods and more streamlined 10b5-1 plans, you can tighten up the insider trading rules for both 10 Q filings as well as monthly KPI drops.
The approach reduces costs of compliance where they are real. It also trims down the drama around the guidance and maintains a healthy information intake for the public.
What the new rules mean
The option of a divided response is likely to occur. Quarterlies are often kept by large issuers who have a diverse range of index holders.
To save time and money, smaller issuers can move from three to six months.
Market quality metrics can tell you a lot about the potential switchers.
The depth and spread of the quoted spreads. Earnings day gap size. The number of analysts who cover a report. Direction of implied and actual volatility at the time report dates.
Also, private channels adjust. Banks who lend to companies with less public information often require more regular private reports in the covenants. Costs are not reduced. The cost is not eliminated.
The market would adjust to a greater degree of uncertainty if semiannual was made mandatory.
The margins of valuations would be compressed a little. Dispersion of information between the haves and don’ts will increase.
The retail investor would have to wait longer for official figures.
These effects will not change the fundamental strengths of US markets. The effects would alter the fabric of the tape as well as the distribution of advantages.
This debate is neither a proxy for a cultural war nor a matter of proper etiquette.
The pace of the information is what anchors price discovery. In a world where there are fewer checkpoints, the narrative can drift more before factual information intervenes.
This may be attractive to those executives that want more runway. The market is sure to charge more for extra time.
The end of public company quarterly reporting? This post may change as new information unfolds
