Short-Term Perspective and Quarterly Reporting – Any Correlation?

President Trump on August 17, 2018, suggested that public companies release their financial statements semi-annually instead of quarterly. He also asked the Securities and Exchange Commission to assess the quarterly reporting. Some business leaders support the proposal, but some investors worry about its effect of deteriorating transparency in financial markets.  

In the President’s tweet, Mr. Trump discussed some business leaders on how to “make business (jobs) even better in the U.S.”. He said one suggested him “Stop quarterly reporting & go to a six-month system”.

Quarterly vs Semiannually Reporting

Prominent Executives Support Semi-Annual Reporting

Berkshire Hathaway founder Warren Buffett and JP Morgan Chase & Co. CEO Jamie Dimon support the reduction of corporate reporting before the President’s proposal. These investors claim that “effective long-term strategy derives economic growth and job creation”. They also said that quarterly reporting reduces long-term growth and sustainability focus and results to concentrate more on short-term earnings, which may lead to unhealthy profits in the future.

Warren Buffett and Jamie Dimon said that quarterly reporting reduces long-term growth and sustainability focus and results to concentrate more on short-term earnings, which may lead to unhealthy profits in the future.

Experts Defending Quarterly Reports

According to WSJ, some investor advocates are opposed. “We don’t like that idea,” said Sandra Peters, head of financial reporting policy for the CFA Institute, which represents chartered financial analysts. “It’s only reducing the amount of information investors get.”

The public companies with short-term perspective reduce innovation opportunities and diminish investor protection in capital markets. The IPOs of the companies has been reduced which results in fewer opportunities for investors to create opportunities in their investment accounts. However, transparency in financial markets is an essential element for shareholders and other stakeholders. The public companies need to communicate their financial performance in a timely manner. This information should not result in hiding financial performance metrics from shareholders long time.

Transparency in financial markets is an essential element for shareholders and other stakeholders. The public companies need to communicate their financial performance in a timely manner.

Conclusion

The public companies need to avoid estimating next quarter earnings to mitigate the issues of myopic loss aversion and short-term perspective. These approximations result in pressure on public companies.

Also, earnings-based compensations create a conflict of interest and encourage corporate executives to focus on short-term.  

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Covers investment, financial analysis and related financial market issues for BrightHedge. He has extensive experience in portfolio management, business consulting, risk management, and accounting areas.

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