Debate has been ongoing for some time now over whether reducing the periodic reporting requirements for companies from quarterly to semiannually could save them time and money. Some people have suggested that reducing the frequency of financial reporting would dissuade short-termism, as companies would no longer focus on meeting analysts’ expectations on a quarterly basis at the expense of long-term performance. This issue has also been debated in many regions of the world. More recently, the US Securities and Exchange Commission (SEC) requested public comment on this topic. For this reason, CFA Institute conducted a survey of its global membership on the topic as well as a roundtable discussion. This report contains our key findings.

Investors Strongly Support Quarterly Reporting

The majority of survey respondents state that investors heavily rely on earnings releases because they are generally issued before quarterly financial reports. Respondents, however, indicate that quarterly reports remain more important to investors than earnings releases. These quarterly reports provide a structured information set that follows accounting standards and regulatory guidelines and include incremental financial statement disclosures and management discussion and analysis. In addition, quarterly reports offer greater investor protections as they are certified by the officers of the company, subject companies to greater legal liability, and are reviewed by company auditors.

As for timing, the majority of respondents believe quarterly reports and earnings releases should be provided simultaneously because this would reduce the significant amount of time spent reconciling the contents of earnings releases with those of quarterly reports as well as ensure that investors can ask better questions during earnings calls by having access to the more detailed information contained in the quarterly report. Roundtable participants agree with these positions.

No Support for Alternative Reporting Models or Reduced Reporting Frequency

Survey respondents and roundtable participants are not supportive of the other proposals in the SEC’s Quarterly Reporting Request for Comment, including the following:

• allowing companies that issue earnings releases the option of using the earnings release to satisfy the core financial disclosures of the quarterly report, or
• allowing reporting companies, or certain classes of reporting companies, flexibility as to the frequency of their periodic reporting.

Investors feel that these proposals would reduce the effectiveness of reporting by reducing comparability, decreasing transparency, and increasing complexity. It would make it more difficult for investors to locate information. Furthermore, investors may have less information that has been reviewed by auditors, and it may be challenging for investors to discern which information has been reviewed by auditors and which has not. Permitting earnings releases to serve as the primary document would be confusing to investors at best and potentially misleading at worst. Investors also believe that reducing reporting frequency would not affect long-term investment but would likely increase stock price volatility.

If small or private companies were exempted from quarterly reporting, investors in those companies would be particularly disadvantaged. Investors in such companies do not require less information. In fact, smaller reporting companies, nonaccelerated filers, and emerging growth companies are the very companies that need quarterly reporting as they receive less media attention and have little or no coverage by research providers. High-growth firms with a shorter track record and fewer investors scrutinizing operations are the exact types of firms for whom things can go wrong quickly. Investors in such companies require more information, not less.

Earnings Guidance

The majority of respondents indicate that companies should not cease releasing quarterly guidance. In a 2008 survey, [1] we asked CFA Institute members whether they favored quarterly or yearly earnings guidance. Investors responded that they preferred annual estimates over quarterly estimates. The survey and roundtable participants agree that investors do use quarterly earnings estimates management guidance because it is another data point that provides context to the marketplace. Investors use yearly estimates more often, however, and prefer broader measurements of corporate performance rather than quarterly earnings hits or misses.

Accordingly, the issue with short-termism does not seem to be quarterly reporting or guidance per se, but rather the need for long-term guidance or insight into the value-generating aspects of the business. As such, the question of quarterly reporting or guidance (quarterly or annual) really may be one of simply more effective and integrated communication tools regarding long-term strategy and value creation. Investors passionately debate the merits and potentially negative consequences of guidance. Irrespective of the periodicity of or support for guidance, investors clearly want the SEC to focus companies on the communication of long-term growth prospects over reducing the periodicity of the reporting of quarterly results.

Focus on Incentive Structures

CFA Institute has long contended that when companies focus on long-term strategy, they are looking at a time horizon of three to five years or longer, not six months. Accordingly, extending the reporting period from three to six months would have little impact. We believe that a better approach to deterring short-termism would be to focus on companies’ incentive structures. Companies interested in encouraging a long-term view should consider adopting five-year performance periods in their incentive plans. In addition to incentives, general corporate leadership, tone at the top, and company culture are important contributors to long- vs. short-termism.

Support for Environmental, Social, and Governance Reporting

When it comes to environmental, social, and governance (ESG) reporting, survey respondents and roundtable participants say that they incorporate governance factors into their investment analysis to a greater extent than they incorporate environmental and social factors. Investors, however, note that ESG means different things to different people. Hence, clear definitions of the terms and related metrics are needed. They also believe that specific ESG and sustainability disclosures should be a regulatory requirement for public companies and that securities regulators should either develop ESG disclosure standards or support an independent standards setter (i.e., a single, global standards setter in this field) to develop such standards.

Conclusion

CFA Institute believes that these results are in line with its long-held position that fully functioning capital markets rely on complete, timely, and accurate information. The provision of such information through a consistent reporting system raises investor confidence, which ultimately strengthens the capital markets. We also believe that companies that provide such information are likely to benefit from a lower cost of capital as investors are better informed and more confident in their decisions.

We believe all companies with any type of securities listed on regulated markets should be required to publish financial information quarterly. Timely and accurate financial information is the lifeblood of financial markets. Quarterly reporting of financial information creates a level playing field for access to financial information between insiders and out-side investors and shareowners and, ultimately, promotes greater investor confidence and improved capital allocation. Semiannual reporting is likely, we believe, to increase stock price volatility around earnings reports as there is greater likelihood of earnings surprises. For these reasons, CFA Institute does not support a move to semiannual reporting.

Sacrificing transparency could lead to other problems, such as placing some investors at a greater information disadvantage, increasing the risk of insider trading as a result of information asymmetry, and allowing stock prices to diverge from fundamentals. Furthermore, quarterly reports not only inform investors of earnings but also provide updates of risks.

In a world in which new technologies are changing the use, creation, and timeliness of data, it seems counterproductive for regulators to consider reducing the transmission of information to investors. Such a change would harm rather than help investors in a multitude of ways. Furthermore, it would increase the use of alternative data sources by sophisticated investors to estimate company revenues and costs to anticipate company profits and take investment positions in advance of formal earnings releases. We think regulators should consider how technology can be better deployed to enhance the quality, timeliness, and cost effectiveness of company reporting rather than simply reducing the reporting requirements.

Introduction

Debate has been ongoing for some time now over whether or not reducing the periodic reporting requirements for companies from quarterly to semiannually could save time and money. Questions also persist as to whether reducing requirements would dissuade short-termism, as companies would no longer focus on meeting analysts’ expectations on a quarterly basis at the expense of long-term thinking. This issue has been debated in many regions of the world.

More recently, the US Securities and Exchange Commission (SEC) requested public comment about how it could enhance, or maintain, the investor protection attributes of periodic disclosures while also reducing administrative and other burdens on reporting companies associated with quarterly reporting. Specifically, the SEC proposal looked at (a) the content and timing of earnings releases versus quarterly reports, (b) the efficiency of quarterly reporting, and (c) the frequency of quarterly reporting, including its impact on corporate and investment decision making.

To address this topic, CFA Institute conducted a survey of its global membership. We surveyed our analysts and portfolio managers globally because our members invest globally, including in US companies. Securities regulators in various jurisdictions are considering similar questions about quarterly reporting. CFA Institute also hosted a roundtable discussion addressing these issues in further detail. The results of the member survey and the roundtable discussion are included in this report, which will be shared with securities regulators around the world. [2]

The complete report is available here.

Endnotes

1Please see “Previously Expressed Positions” in the complete report. (go back)

2We also analyzed regional differences in survey responses. While we did not find many differences between regional and global results, the paper notes where regional differences do exist. (go back)