President Donald Trump wants to overturn a 55-year-old stock-market tradition, one that investors rely on: the quarterly report.
Since the 1970s, the Securities and Exchange Commission (SEC) has required publicly traded companies to issue earnings reports every three months. These reports not only reveal a company’s earnings, but also information about their operations and financial risks and rewards going forward.
Just as he did in his first term, Trump is calling on the SEC to relax the rules so that companies would only have to issue an earnings report twice a year — once every six months.
“This will save money, and allow managers to focus on properly running their companies,” he declared on social media on Monday when he made the call for the rule change.
When Trump first proposed the idea in 2018, the SEC turned him down. But it looks like he’ll get his way this time. [1]
SEC chairman Paul Atkins — a Trump appointee — told CNBC that Trump’s proposal is “a good way forward.” Atkins noted that companies could still report earnings quarterly if they wished, or opt to do so just twice a year at their own discretion.
Trump’s proposal has set off a renewed debate over the pros and cons of semi-annual reporting and may have some investors wondering what to do if the rule does change.
Proponents of semi-annual reports, including Atkins, argue that quarterly reporting leads to short-term thinking on the part of investors — suppressing investment based on short-term results.
They point to Europe and the U.K., which switched from quarterly reporting to semi-annual reporting in the 2010s. So did semi-annual reporting result in greater corporate investment than quarterly?
Not in the U.K., according to a 2017 Columbia Business School study, which found “no detectable increases in their levels of corporate investments.” [2]
Read more: Rich, young Americans are ditching stocks — here are the alternative assets they’re banking on instead
Some investment experts — like Berkshire Hathaway CEO Warren Buffett — believe in the value of quarterly reports, but would like the SEC to drop the requirement for a “guidance” section in every report, which he says can lead to “bad things.” The guidance section includes data on such things as a company’s projected revenue.
In 2018, he and James Dimon, CEO of JP Morgan Chase, co-authored an op-ed in the Wall Street Journal to that effect.
They argued that the guidance section of quarterly reports “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” while causing an overall decline in the number of public companies in the U.S. [3]
They stressed that their views on guidance “should not be misconstrued as opposition to quarterly and annual reporting,” as transparency about a company’s finances and operating results “is an essential aspect of U.S. public markets.”
It’s that question of transparency, and the erosion of investor confidence, that’s at the heart of the opposition to semi-annual reports.
While it’s true that quarterly reporting can prove costly and time-consuming, Investing.com highlighted how the move to semi-annual reports “would work against investors by increasing information gaps, raising the risk of surprises, and creating more room for insider advantage.”
And Bloomberg noted that “Waiting six months between formal reports could feel like a lifetime in a dynamic economy” while also allowing companies to “bury bad news.”
With the potential pitfalls and opportunities for deception, it’s fair to say that a move to semi-annual earnings reports will trigger a flood of anxiety in some investors.
But there are ways to protect your portfolio, even if you’re worried that some companies aren’t being entirely forthcoming with their financials.
Whether or not you agree with Trump’s view on semi-annual earnings reports, sticking with investments for the long haul is a formula for success. As Capital Group succinctly put it, when it comes to riding out turbulence in the stock market, “history has shown that positive outcomes occur much more often over longer periods than shorter ones.”
Keep an eye on your investments. Global investment firm T. Rowe Price notes that “whatever is happening in the headlines may not be happening in your account.”
If you do spot anything questionable about the way a company reports its earnings, investigate and act accordingly.
If you do have concerns about any investments in your portfolio, rethink your asset allocation. Edward Mendlowitz, emeritus partner at national accounting and advisory firm Withum, cited diversification as a safety net against everything from a company’s faulty financial forecast to the failure of elected officials to properly govern.
And the SEC suggests doing your own research before investing in any company. That includes going over the financial statements filed with the commission and keeping a sharp eye out for red flags that signal fraud or other trouble down the road.
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[1]. CNBC “SEC to propose rule change on Trump’s call to end quarterly earnings reporting, says Chair Atkins”
[2]. Columbia Business School “Consequences of Mandatory Quarterly Reporting: The U.K. Experience”
[3]. Wall Street Journal “Opinion: Short-Termism Is Harming the Economy”
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