Why quarterly reporting should remain

By Ranjit Singh

THE debate between the merits of quarterly reporting and semi-annual reporting for listed entities has been ongoing for some time and gained traction after President Donald Trump’s tweet in August 2018 asking the Securities Exchange Commission (SEC) to look into the viability of abolishing quarterly reporting in the US and migrating to a half-yearly reporting regime.

According to Trump, doing away with quarterly reporting would be better for businesses as it reduces compliance costs and enables companies to focus on growing their business.                                                                               

Bursa Malaysia had made it mandatory for public listed companies (PLCs) to undertake quarterly reporting in 1999, some 21 years ago.

On  Sept 28, 2018, Bursa Malaysia had issued a consultation paper on interim reporting eliciting responses from stakeholders on whether quarterly reporting should be maintained or the local bourse should move to half-yearly reporting.

A source tells FocusM that Bursa is still analysing the responses and has not arrived at a decision regarding the matter.

Among others, Bursa’s consultative paper cites regular access to information and better financial discipline among corporates as merits of quarterly reporting.

Proponents of quarterly reporting said that by abandoning quarterly reporting, companies would be less transparent and accountable to their shareholders.

Some experts in business law also fear that moving to a six-monthly reporting model could have significant downsides, including a greater temptation for companies to cover up missteps and an increased potential for insider trading.

In line with Europe?

The European Commission moved to the half-yearly reporting model in 2013 and corporates with businesses in the US have made calls for the harmonisation of the reporting practices between the two regions.

There is also the argument that moving to a twice-yearly model from four times a year model wouldn’t necessarily move focus onto real long-term growth, as companies are still focusing only six months out. Further to this, investors need access to timely information about new risks to the company and a quarterly formal report provides that.

Quarterly reporting also helps build trust between shareholders and the company’s CEO and management and less frequent formal disclosure could result in less transparency. 

With less frequent earnings reports, investors might turn to alternative information sources, which could mislead them into overreacting or under-reacting.

Authors Salman Arif and Emmanuel De George studied the reports and stock price performance of more than 9,400 companies in 29 countries between 2001 and 2012. They found that a reduced frequency of reporting “may lead investors to overreact to alternative sources of information for non-reporting periods due to the absence of own-firm earnings announcements.”

Arif and De George said their research suggested that “starving investors of interim financial reporting” could impair investors’ ability to assess companies

There was also the concern that moving away from the quarterly reporting regime would cause a perception gap in the US capital markets, which are currently considered liquid and safe, and a move to twice-yearly reporting could affect the perceived transparency of the US financial markets.

The supporters of the half-yearly reporting regime say that it could potentially save companies from additional compliance costs which include legal, filing and secretarial. It would also allow companies to have more time and resources to focus on long term growth rather than short term numbers to meet “short-termism.”

There has been no empirical evidence to show that investors would be worse off if they obtained information on the performance of a company only twice a year.

Companies are also under pressure to report their earnings every quarter and this requires them to manage analysts’ expectations constantly.

There is also a school of thought, that the focus on quarterly results has given rise to artificial stock price manipulations such as unusual share buybacks, non-strategic cost-cutting, less investment in longer-term basic and applied research and unhealthy pressure on labour costs.

The jury is still out on which is better, quarterly or half-yearly reporting. Both have their advantages and drawbacks and the onus will fall on the regulator on which regime is better for all stakeholders.

However, to remove any advantages that insiders may have over ‘outsiders,’ quarterly reporting is the preferred modus. Stakeholders need constant information to make informed decisions and quarterly reporting affords this.

The argument that compliance costs could be reduced with half-yearly reporting is shallow as the cost savings from such an endeavour is marginal. Stakeholders would be deprived of material information as it becomes available if companies resort to half-yearly reporting. – Feb 7, 2020

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