Guidance the real issue in reporting

It was perhaps the most sensible tweet of Donald Trump’s presidency so far. The US president’s call on Friday for the Securities and Exchange Commission (SEC) to end quarterly earnings reporting and shift to a sixmonth system is eminently worthwhile. Yet the issue is not how often earnings reports are, but what they involve.

US quarterly earnings seasons have certainly become a noisy, time-consuming and costly circus, in which companies, analysts, investors and financial media all participate. They also have elements of a game. Companies can massage expectations, then the numbers themselves — by adjusting when they book revenues or costs — to try to meet or beat forecasts.

The wider concern is that quarterly reporting fosters a short-termist culture across corporate management and the investment community. Some bosses — most recently Tesla’s Elon Musk — have cited the tyranny of quarterly reporting as a reason for taking listed companies private. The European Commission, which required EU companies to shift from six-monthly to quarterly reporting in 2007, reversed track from 2014.

In fact, evidence on the merits of less frequent reporting is inconclusive. One study examined US companies from 1955 to 1970, when the SEC moved from annual, to sixmonthly, and then quarterly reporting. It found that annual capital investments declined about 1.5% — and companies reduced expenditure most in industries where investments take longer to pay off. An analysis of UK companies’ shift from six-monthly to quarterly reporting in 2007-2014 found no material change in investment levels.

But the crucial distinction to draw is between compulsory quarterly reporting and the voluntary, but still common, practice of companies issuing quarterly earnings per share guidance. It is here that the SEC should focus its attention. These forecasts, above all, fuel the meet-or-beat culture and provide the targets around which short-term investors try to make fast bucks. London, August 19