Quarterly reporting – a presidential challenge
It’s not every day that the world’s most powerful person takes a keen interest in… financial reporting.
This week, President Trump reiterated his view that US listed companies should move from quarterly to 6-monthly financial reporting to “save money and allow managers to focus on properly running their companies”. This has predictably met with a mixed reaction. Whether you see it as a good or bad thing probably depends on a combination of personal preference and your place in the equity market ecosystem.
A battle of liquidity, volatility and cost
Quarterly results provide information, but they also act as liquidity events in equity markets. Prices move and trading volumes are significantly higher on results days. So quarterly results are a catalyst for both liquidity and volatility – this is sometimes beneficial to investors and almost always beneficial for banks and brokers.
There’s no shortage of precedent. Six-monthly reporting is common across Europe, with trading updates often taking the place of Q1 & Q3 results. While the world’s largest and most liquid capital market rarely needs to look to Europe for inspiration, there is plenty of evidence available globally.
What it means for companies
For listed companies, the benefits of quarterly reporting are less clear. A higher frequency of information may mean a lower cost of capital, but this is unlikely to be material. Due to the high financial and opportunity costs of the quarterly results treadmill, we suspect most companies would be happier with less frequent reporting.
Quarterly results are theoretically a great opportunity for companies to get visibility, but the market’s focus usually remains on the most broadly followed stocks which don’t really need it. Given a choice, larger companies would be more likely to stick to a quarterly timetable than small or mid-caps.
What it means for investors & markets
We think the consequences would be:
– A smaller number of higher volatility events: less frequency of information should translate into a smaller number of bigger share price moves as the market digests new information
– More profit warnings: with such a short gap between results, quarterly reporting allows for companies to manage market expectations through regular, granular guidance. On a different timetable, expect a higher number of profit warnings – especially outside of the normal results schedule
– Investment managers would quickly adapt: professional equity investors are set-up to deal with markets as they function today. If reporting timetables change, so will the pattern of trading volumes, average holding periods and investment strategies
– Some sectors impacted more than others: companies operating in fast-moving, short-cycle industries see a lot of change each quarter and have a lot to say. For long-duration sectors like infrastructure or real estate, full quarterly updates often add very little
Could the de-equitisation trend start to reverse?
The number of US-listed equities has halved since the late-1990s (from c. 8,000 to 4,000 today). Reducing reporting costs could be a small step towards slowing the de-equitisation of market, particularly in the small and mid-cap space. But the growth of private markets and the “private for longer” trends are unlikely to see a material impact.
That said, frequency of reporting is only one problem – the volume of reporting is another. Listed companies are producing more and more information, with their reporting ballooning in size to cover a much wider range of financial and – particularly – non-financial data. We think this is a much bigger driver of cost than the frequency of reporting.
