Would a Shift to Semiannual Reporting Really Affect Short-Termism?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Stock Market Short-Termism’s Impact by Mark Roe (discussed on the Forum here).

You remember, of course, that last month, the president, on his way out of town for the weekend, tossed out to reporters the idea of eliminating quarterly reporting. (See this PubCo post.) The argument is that the change would not only help to deter “short-termism,” it would also save all public companies substantial time and money. But how meritorious is that idea? According to this article in the WSJ, if a change from quarterly reporting to semiannual reporting were actually implemented, smaller companies could experience significant cost savings, but large companies—not so much.

While it may be debatable whether a shift from quarterly to semiannual reporting would have any real effect on short-termism, there’s not much question, the article asserts, that it would save time and costs, at least for some companies. The article maintains, however, that

“size matters. The anticipated cost savings would benefit smaller public companies, but the change probably wouldn’t make a substantial difference for larger firms….Accelerated and large accelerated filers—companies that have earlier deadlines to file annual reports with regulators—paid audit fees of $541 per $1 million of revenue to their independent auditors in 2016, the latest full-year data available. By contrast, smaller reporting companies that recorded revenue in 2016, a group of 1,554 firms, paid $3,345 per $1 million in revenue, according to an analysis from consulting firm Audit Analytics conducted for The Wall Street Journal. The disparity reflects the fixed costs involved in performing annual audit and review work, as well as the economies of scale that can make large companies more efficient. For smaller companies, absolute costs matter more because they represent a greater share of potential profit.”

Because the annual 10-K requires an audit, it accounts for a much greater proportion of the accounting costs, according to the article; review of the three quarterly reports together account for only 15% to 20% of the overall cost. But “eliminating two of those three reviews wouldn’t slash two-thirds of the cost, [accountants] said, as the midyear review would be more robust and command higher fees.” But there are also internal costs and time associated with closing the books (which, last year, took most companies 4½ days), preparation of related communications and legal review. And, the article notes, “CFOs will be faced with a dilemma: Apply the time savings to financial planning, analysis and the improvement of operations. Or keep distributing the quarterly performance figures, which analysts and investors prize.”


In this article, professors from Wharton and Georgetown, discussing the issue of quarterly reporting, observed that companies have in the past decided to exceed the legal requirements. Case in point: the U.K., which, in 2007, had mandated quarterly reporting, changed back to semiannual reporting in 2014, “and Europe followed suit. As it turned out, companies in the U.K. and Europe continued to put out quarterly reports, egged on by investors, analysts and portfolio managers.” Of course, there’s no predicting whether U.S. companies would have the same reaction. After all, some business groups view the costs and pressures associated with quarterly reporting as one of the deterrents to going public and maintaining public company status. (See this PubCo post.

The WSJ reminds us that, in 2016, the SEC issued a 341-page Concept Release on Business and Financial Disclosure Required by Regulation S-K, as part of its Disclosure Effectiveness Initiative, which requested comment on the frequency of interim reporting. The release observed that the type of industry or size of the company could make a difference, noting that the “costs of more frequent reporting may impose a disproportionate burden on smaller or less capitalized registrants. At the same time, smaller registrants may be more volatile and quarterly reporting may provide more timely disclosure of performance issues. Additionally, because smaller, capital-intensive companies may need greater or more frequent access to capital markets, more frequent reporting may provide greater investor confidence and a lower cost of capital for these companies.” Among other questions, the release asks whether quarterly reporting should be reconsidered for smaller or all companies. The article observes that, in response, EY suggested “scaling interim reporting requirements only in limited circumstances,” such as “for smaller reporting companies that are not listed on a national exchange.” Will that be the direction the SEC ultimately decides to go?

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