Study Examines the Impact of Reporting Frequency
Although some argue that quarterly earnings encourage short-term thinking, the findings of a study of UK companies help to dispel that notion. The authors, among them former MFS Investment Management chairman Robert Pozen, found that companies still invested for the long term even after they were required to start reporting on a quarterly basis.
The new CFA Institute Research Foundation brief “Impact of Reporting Frequency on UK Public Companies” examines the time period between 2007, when UK regulators began requiring quarterly reports from companies, to 2014, when they dropped that requirement. The authors found several effects associated with the two different approaches to reporting frequency.
Effect of Requiring and Not Requiring Quarterly Reporting
No difference in long-term investment activity: In short, “the frequency of a UK company’s earnings reports does not materially affect its level of corporate investment,” the authors wrote. The study did not find any significant change in the levels of long-term investments from 2007 to 2010 between voluntary adopters and mandatory switchers (voluntary adopters were companies that were already reporting quarterly prior to the rule change, while mandatory switchers were the companies that were suddenly required to report each quarter after the rule change.) The researchers did another analysis of 2010–2013, to remove any effects from the financial crisis, which yielded similar results.
Quarterly reports became more qualitative than quantitative: The UK regulators did not force companies to include financial statements in quarterly reports, and flexible guidelines allowed companies to include more qualitative information. Among those companies that chose to report quarterly results prior to 2007, a little over half included earnings and sales information in 2005. By 2010, that figure was less than 30%.
More companies issued managerial guidance: The percentage of companies that issued guidance rose substantially from 2005 to 2010 for both voluntary adopters (30% to 53%) and mandatory switchers (28% to 49%). UK companies typically issue annual guidance and tend to focus on metrics other than earning per share, such as aggregate earnings or sales.
Analyst coverage increased: The average number of analysts following UK companies jumped significantly from 2007 to 2009, with a 21.5% increase for mandatory switchers and a 26.5% rise for voluntary adopters.
Based on these findings, the authors offered some potential policy recommendations:
Going from quarterly to semi-annual reporting does not combat “short-termism”: In light of the results on long-term investment behavior, the researchers found no reason to believe that removing quarterly reporting requirements would stop companies from engaging in short-termism (i.e., sacrificing long-term investment opportunities in order to bolster short-term earnings results).
Quarterly reports should be streamlined and include relevant metrics: Even after they were no longer required to, most companies kept reporting quarterly. The authors believe that these reports have value, but also that they can be improved. Quarterly reports should be streamlined to make it easier for smaller institutions to prepare them, and these reports could benefit from having metrics more germane to the company, they said.
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Photo Credit: CFA Institute