Corporate Earnings – Too often, or too infrequent?

Barry Ritholtz theorized an interesting concept over the weekend in Bloomberg. He suggested that instead of discussing corporations lessening the times they present earnings for shareholders throughout the year, we should have companies increase the reporting.

A recap on the topic –

The first moment changes to corporate reporting came into light was when Blackrock CEO Larry Fink penned a letter to many CEOs lobbying for the change. He wanted less reporting, which would help corporate governance, and decrease short-term market fluctuations. His theory was less reporting would make companies and investors more focused on long-term goals, rather than accomplishing short-term targets set by Wall Street analysts. 

The next big step forward for this topic was a few months later in spring of 2016 when presidential candidate Hillary Clinton adopted the request of Fink as part of her platform.  She alluded to quarterly earning reports as Quarterly Capitalism, suggesting companies are constantly trying to hit a target every 90-days, instead of working to long-term success.

Recently, President Trump has come out in agreement with the suggestions originally theorized over two-years ago, and has requested the SEC study the change. His ask is to move quarterly reporting to semiannual, or two reports per fiscal year.

Why does this matter?

Quarterly reporting is one of two sets of data that investors take in stride when making decisions to buy and hold stocks. The second being a constant stream of economic data. For example, quarterly GDP, monthly unemployment, and indexes like consumer confidence, and manufacturing information. Earnings reports are very big deal on Wall Street, and definitely take part in every investors decision. The reports offer traders with a tremendous set of information relevant to the company. The report is much more than their earnings, or profit.

Examples of relevant pieces of information in each report depend on the company or industry. For instance, Apple investors rely on iPhone sales, and supply targets. Boeing reports focus on the amount of jets delivered to airlines. Wells Fargo traders rely on the amount of home loans they originated. Each company has different parts of their report that are held in higher esteem over others.

So, do we move to less reporting, or more reporting?

Less is more. That’s the old adage. Does it apply to this situation? It depends on how you want to examine it. Let’s look at both sides.

Pros of less reporting

  • Investors will evolve, and become longer-term oriented
  • Companies will have less stress operating to targets set by Wall St that force it be met within 90-days
  • You can assume accounting would become more ethical since there would be more time for preparation
  • Ingenuity and creativity in companies likely expands since their investors are less worried on short-term issues

Cons of less reporting

  • Investors are prone to shocks and surprises because they haven’t heard from a company in 180-days
  • The market is extremely volatile at times, and information is readily available in this technologically efficient age. Not hearing from a company for up to six-months during a turbulent time could create mass speculation because of investors lack of information

Pros of more reporting

  • Investors will worry less about short-term targets, because they are receiving daily or weekly data
  • More transparency in companies leads to less shocks and Black Swan events
  • Accounting would be difficult to falsify since we are recipients of constant information. Errors present another dilemma
  • Corporations can have accounting, filing, and reporting with the greatest, streamlined efficiency as this develops over time

Cons of more reporting

  • This is certainly an idealistic suggestion, as implementation would prove difficult. Largely, because every industry operates differently, and daily or even weekly numbers may prove difficult to compile
  • Some companies wouldn’t be beneficial to receiving a daily report. For example, Boeing delivered 763 jets in 2017. This amounts to roughly two per day. Is it helpful to investors if they are mindful of this number daily?

Both sides sound possible, and both sides offer investors good points. It is worth considering adding frequency to reporting, instead of doing away with it. Maybe, a solution can present itself with both sides walking away satisfied. For example, what if companies offer certain metrics daily or weekly, with the official corporate report released every 180-days. This allows for investors to understand where the company is trending, while not overloading accounting departments to deliver everything on a more continual basis.

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