Does Quarterly Reporting encourage short-term thinking?
Policy makers in some countries are sufficiently concerned about the “90 day strategic horizon” that quarterly reporting might impose on management and boards of public companies that they have removed the requirement to report on a quarterly basis.
The UK introduced quarterly reporting requirements (although it did not mandate specific financial disclosures), doubling the reporting frequency for public companies in that country from 2007. This obligation was then removed in 2014.
A new study by the CFA Institute has examined the disclosure approach of UK companies before and after this change, and looked into the (long term) investment appetite of companies to try to discern a change in management behaviour.
It concludes that there wasn’t a change in the long term investment approach of companies, regardless of their reporting obligations. The authors state that:
“In short, contrary to the rationale behind the 2013 amendments to the EU Transparency Directive, moving from quarterly to semiannual reporting is not an effective remedy for undue corporate emphasis on short-termism. If quarterly reporting leads company executives to focus on profits during the next three months, then a shift to semiannual reporting might plausibly lead corporate executives to focus on profits during the next six months—not on corporate investments with good prospects over the next three to five years.”
Furthermore, the UK findings indicate that:
“Companies reporting quarterly attract a larger following of security analysts, and those analysts’ earnings estimates improve. Conversely, when companies stopped reporting quarterly, there was a decline in their analyst coverage but no significant change in the accuracy of analyst estimates for these companies.”
The authors suggest that a regulatory framework of KPIs that are relevant to individual companies and sectors, rather like those being proposed by the SASB would be more beneficial to users and companies alike in filling in the gaps in investor knowledge. Compelling? Well it’s certainly a useful addition to the debate and will no doubt give rise to significantly more research in this area.
