President Trump asked the Securities and Exchange Commission to consider eliminating requirements that publicly traded companies post quarterly earnings reports, a move that could do away with a cornerstone of American capital markets.
In a message posted on Twitter early Friday, the president wrote that he had directed the regulator to study moving corporate America to reporting earnings twice a year, saying such a move would allow greater flexibility and cost savings.
In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!— Donald J. Trump (@realDonaldTrump) August 17, 2018
The directive does not mean the imminent demise of quarterly earnings reports, which keep investors informed on the financial health of publicly traded companies. The disclosures are required under federal securities law. The commission is independent of the executive branch, although the White House nominates the chairman of the S.E.C. and the other four commissioners, who all serve staggered, five-year terms.
“The president has highlighted a key consideration for American companies and, importantly, American investors and their families — encouraging long-term investment in our country,” the S.E.C. chairman, Jay Clayton, said in a statement. “The S.E.C.’s division of corporation finance continues to study public company reporting requirements, including the frequency of reporting.”
Mr. Trump’s suggestion is not unheard-of. In 2013, the European regulators abolished requirements that publicly listed companies file quarterly reports. On the other hand, Japan has moved closer to current American rules, requiring quarterly reporting starting in 2008.
Still, any move away from the system of quarterly reporting would be a significant shift for investors, who have come to rely on the regular financial disclosures on the performance of publicly held companies.
“The fact of the matter is, investors are used to getting updates four times a year on the status of companies’ financials, and changing that would require a change in behavior,” said Ed Clissold, the chief United States strategist for Ned Davis Research. “On the positive side, getting frequent updates holds companies accountable. They lay out plans to grow their business, and quarterly updates are a chance for investors to see the progress toward those objectives. The downside is that companies have occasionally managed their businesses to meet those quarterly objectives.”
Critics have long argued that quarterly reporting can drive executives to give priority to short-term goals, rather than more strategic long-term objectives. Elon Musk, the chief executive of the electric-carmaker Tesla, was the latest corporate chieftain to raise the issue. In a message to Tesla employees last week explaining why he has proposed taking the company private, he wrote, “Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long term.”
Martin Lipton of the law firm Wachtell, Lipton, Rosen & Katz, one of the most ardent defenders of big corporations, has already called on the S.E.C. to consider letting companies step off the quarterly reporting treadmill.
There is some evidence that public companies spend less than private firms on plants, equipment and research. A paper published in the Review of Financial Studies in 2014 found that privately held companies were more responsive to changes in opportunities than publicly listed companies.
The paper also found that once companies go public, their appetite for capital spending tends to diminish. That finding is consistent with the idea that being a public company can promote short-term thinking, perhaps because of the scrutiny of disclosures such as quarterly earnings reports. But the authors of the paper also emphasized that other explanations could also be responsible for the shift.
Investors, on the other hand, are less likely to support the idea floated by Mr. Trump, which would cut down on the information available about how the companies were performing.
“Investors and other stakeholders benefit when regulations ensure that important information is promptly and transparently provided to the marketplace,” said Amy Borrus, deputy director of the Council of Institutional Investors, a group representing large investors such as pension funds and endowments. “Investors need timely, accurate financial information to make informed investment decisions.”
James Chanos, a well-known investor who specializes in shorting stocks, or betting on their decline, agreed.
“I’m in the camp of more disclosure is better than less,” Mr. Chanos said. “And the U.S. financial disclosure is the best in the world.”
He added, however, that some elements of the quarterly reporting process should be re-examined, including the “rampant” release of quarterly numbers that do not conform to the standard set of accounting rules used in the United States, a practice that often makes a company’s financial results look better.
Others argue that longer stretches without corporations providing public information could lead to to abuse by those with inside information.
“Quarterly disclosures are very important. A lot can happen in six months, and it’s just not appropriate to reduce disclosures,” said Marcus Stanley, the policy director for Americans for Financial Reform, a coalition of foundations, unions and public interest groups that pushes for stronger financial regulation. “It’s just going to advantage insiders further.”
Even those who criticize quarterly earnings may not want to abolish them altogether. In an essay published in The Wall Street Journal this summer, Jamie Dimon, the chief executive of JPMorgan Chase, and the billionaire investor Warren E. Buffett said that they favored eliminating quarter-earnings guidance, which are the targets companies hope to hit, but not the quarterly earnings results themselves.
“Transparency about financial and operating results is an essential aspect of U.S. public markets,” they wrote. “We support being open with shareholders about actual financial and operational metrics.”
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