President Donald Trump has asked the U.S. Securities and Exchange Commission to study the decades-old requirement that publicly traded firms produce quarterly earnings reports.
The news came via a tweet this morning from the president, who said he received insight from “some of the world’s top business leaders,” one of whom suggested that if the SEC were to “stop quarterly reporting [and] go to a six month system,” it would boost U.S. business growth and employment.
The commander in chief’s sentiments stirred up an ongoing debate, which has seen leaders of publicly traded firms, on one side, complain of the pressures — stoked by quarterly earnings releases and conferences calls — to meet short-term goals at the expense of long-term stability. (In retail, Nordstrom this year notably tried to execute a go-private transaction in hopes of avoiding a problematic shareholder gaze. Similarly, Tesla CEO Elon Musk proposed taking the firm private, citing unhealthy short-term pressures created by the SEC reporting standard.)
On the other side are many investors who say frequent insight into the financial performance of corporations is critical to their own decision-making and financial security.
While it’s difficult to determine what will come of Trump’s tweet and charge to the SEC, if such a change were to occur, Wedbush Securities analyst Christopher Svezia said there could be positives for both investors and companies.
“[A six-month system] would get investors and companies to think longer-term,” Svezia said. “It may [also] limit volatility.”
Indeed, corporate stocks are known to see sharp gains and falls on the heels of quarterly earnings releases that beat or miss forecasts — and market watchers have often said investors’ quick reactions are unwarranted or ill-advised.
“There are often quarterly metric fluctuations that tend to even out over six months, so one would think that some of the extreme, arguably knee-jerk reactions invests have would be reduced,” explained B. Riley FBR analyst Jeff Van Sinderen. “One of the inherent issues with quarterly reporting is that it does tend to drive management to make decisions geared toward short-term metrics, which is not always in everyone’s best interest.”
Still, Van Sinderen cautions, six months can be a long time for smaller companies — particularly those shouldering difficult challenges — and can lead to other issues should those two reports differ drastically.
“So in some cases, a lack of quarterly metrics could result in even more dramatic stock price swings, as some ‘blindsiding’ occurs,” he added. “[This is especially true] for companies in the consumer space — a lot can happen in six months.”
Meanwhile, Svezia noted, less frequent updates and disclosures would likely be a source of frustration for investors.
The Securities Exchange Act of 1934 was created to foster greater financial transparency and accuracy and to reduce fraud or manipulation. The SEC is the regulatory arm of the SEA, and since its formation, quarterly earnings reports have been mandatory.
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