NEW YORK—Four times a year there’s a kind of parade on Wall Street: companies announce their quarterly earnings, all in a row, with the banks first, then the tech companies, and the retailers bringing up the rear. Stocks can rise or plunge based on the results. And three months later it all happens again.
But regulators are wondering if it’s time for a change.
For about 40 years, companies have had to make four yearly reports of basic financial information, including how much money they earned or lost, how much revenue they took in and what their expenses were. It’s supposed to help investors make informed decisions. But the Securities and Exchange Commission (SEC) said Wednesday that it may change those rules. It noted there are drawbacks to the requirements, like the time and money companies have to spend to prepare the reports, and the possibility that important information gets lost in the flood of stuff companies have to disclose.
The SEC didn’t propose any specific new rules or commit to making changes. It’s really asking some philosophical questions: what do investors need to know? What’s the balance between transparency, which investors need, and burdening companies with regulations?
Some observers think quarterly reports are bad for companies. BlackRock CEO Laurence Fink said in February that the constant reports encourage short-term thinking, and push companies to spend gobs of money on stock repurchases or big dividends, or repeatedly slashing costs instead of making longer-term investments that would help their business or the economy in the years to come. Last year Hillary Clinton criticized “quarterly capitalism” and made some of the same points.
“Quarterly numbers force short-term thinking on the part of investors and on the part of management,” said Jack Ablin, chief investment officer at BMO Private Bank. Still, Ablin said he opposed a change.
“I think more information is better,” he said.
If the SEC decides to make a change, the simplest option might be making companies report their results twice a year instead of four times. That’s how the European Union handles earnings, although some countries within the EU have more stringent requirements. If companies wanted to give quarterly updates, they could still do so.
Erik Gordon, professor at the University of Michigan’s Ross School of Business, said companies may want to spend less on earnings filings, but even a change to semi-annual reports would be bad for many investors.
“When you cut down on required public disclosure, you favor institutional investors over individual investors,” he said. That’s because big investment firms like BlackRock or giant pension funds have the ability to do far more analysis and research of companies. Gordon says smaller investors might have a lot less data to work with.
“An individual person can’t call IBM’s customers and find out what’s going on,” he said. “It will hurt individual investors and put them at a bigger disadvantage to institutional investors.”
Regardless of how many times companies report or what those reports look like, Ablin said it’s vital that investors look at company results closely and be skeptical.
“My frustration is, there’s a fair amount of latitude that investors give management in reported earnings,” he said. “In many respects I think investors tend to take reported earnings at face value.”
