Two camps emerge in a heated regulatory debate over the frequency of earnings reports.
Can publicly traded companies ever disclose their earnings to investors too frequently?
This question has divided financial regulators in recent years. In 2018, the Trump Administration requested that the U.S. Securities and Exchange Commission (SEC) explore reducing the frequency of public-company earnings-disclosure requirements to a semiannual basis from the current quarterly system. The SEC study that responded to this request has sparked a debate among investors, legal scholars, and regulators over securities disclosure rules, although it has yet to lead to changes in the frequency of required filings of earnings reports.
The SEC has required public companies to report quarterly earnings in a standardized manner since 1970. Reporting on a quarterly basis, however, roots back to the Securities and Exchange Act of 1934, which mandated periodic disclosure for companies listed on an exchange, such as the New York Stock Exchange.
In undertaking the study suggested by President Trump, the SEC requested comments on the issue. Eventually, in 2020, the SEC adopted new “principles-based” disclosure rules in an effort to adapt specific disclosure categories to industry needs, the first major change in over 30 years. It made no changes, however, to the frequency of disclosure requirements.
Current SEC Chairman Gary Gensler removed a planned rulemaking on quarterly reporting from the agency’s regulatory agenda in 2021, signaling an end to the SEC’s exploration of a reduction in the frequency of disclosures.
But industry groups, such as the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, have urged the SEC to evaluate the effectiveness of the current disclosure regime. In the past, the group argued that investors were being “inundated with information” and would benefit from limiting “extraneous” disclosures, resulting in better market discipline and more efficient allocation of capital.
Some legal and business scholars have agreed that the SEC should rethink the frequency of quarterly earnings, arguing that “it is not clear if investors would really be worse off” under a semiannual reporting regime. Other experts argue, however, that limiting the frequency of earnings disclosures could work against, rather than for, investors.
The SEC received nearly 100 comment letters after its 2018 request expressing a range of perspectives. Two main camps have emerged: those who oppose quarterly earnings because they believe the high frequency of disclosure leads executives to make decisions that benefit only the short term, and proponents of quarterly reports who believe investors need frequent transparency to make informed choices.
Opponents of quarterly earnings disclosures take issue with the encouragement of short-term thinking driven by more frequent reports. They argue that “short-termism”—the idea that public companies shirk long-term investments and profits in favor of near-term boosts to quarterly earnings—harms investors. The critics claim that in response to more frequent disclosure, executives reduce productive, long-term investments, such as research and development, that would be beneficial to investors and to society.
Some scholars also fear that managers engage in “accounting gimmicks” to manipulate reported earnings and reduce quarterly fluctuations. They have found that privately held companies not subject to quarterly earnings disclosures were “more responsive to changes in investment opportunities” than their public counterparts. The “comparable public firms” studied were even less responsive when those companies were in industries with stock prices that reacted more strongly to quarterly earnings releases.
But proponents of keeping quarterly earning disclosures argue that the main advocates of decreasing the frequency of earning disclosures are corporations, rather than investors. These proponents, which include Wall Street watchdog Better Markets, recognize the problem of short-termism but believe the issue could be resolved by tailoring executive compensation to long-term goals. For instance, the SEC could require companies to alter their incentive structures to ensure managers are not paid bonuses for quarterly fluctuations in reported earnings.
Still, requiring investors to rely on semiannual earnings would remove a layer of transparency, some scholars warn. One study has also found that, in the absence of quarterly earnings reports, investors overreact to alternative forms of information which may not be indicative of a particular company’s earnings.
Skeptical of reducing earnings disclosures, some other scholars argue that the issue with short-termism lies with earnings projections rather than earnings disclosures. Public companies are not currently required to issue projections. But UCLA School of Law professor James Park has found that transparency between investors and companies could be promoted by requiring companies to disclose their projected earnings each quarter and the assumptions underlying those projections. Investors would then be less reactive to quarterly earnings fluctuations, removing corporate incentives to pursue short-term boosts, argues Park.
Removing quarterly earnings disclosure requirements is not a novel idea. The European Commission made this change in 2013, although European companies listed on U.S. exchanges still must make quarterly disclosures.
In addition, a study has indicated that when the United Kingdom moved from semiannual to quarterly reporting in 2007, there was no change in long-term investment by public companies.
Some scholars argue that the answer lies not in a standardized reporting frequency for every company but in a bifurcated reporting system based on a company’s industry and purpose. In a comment letter to the SEC, scholars at Brown University proposed a bifurcated reporting system that would require smaller companies to report only twice per year, coupled with a focus on encouraging less stringent earnings-per-share guidance.
This framework would allow smaller companies that may be more prone to safeguarding earnings from quarterly fluctuations to make more substantial long-term investments without risking a market overreaction to higher capital expenditures as a percentage of revenue, the authors of the Brown report suggest.
The high level of debate surrounding the quarterly earnings problem indicates that the question of reporting frequency may someday return to the SEC’s list of action items. Until then, publicly traded companies continue to report their earnings on a quarterly basis.