Should corporations be allowed to report earnings semiannually instead of quarterly? As part of Paul S. Atkins’ “Make IPOs Great Again” agenda, it would help “incentiviz[e] companies to go and stay public,” the Securities and Exchange Commission chairman said when introducing the proposal in May.
President Trump was for it. Nasdaq CEO Adena Friedman hailed it as an antidote to short-termism. The Business Roundtable and U.S. Chamber of Commerce got behind it in weighty responses during the comment period that closed July 6.
But if the proposal goes forward, it will be against the grain of all but a small fraction of the more than 220,000 submitted comments. The “Shadow SEC,” a group of law school professors including Harvard’s John Coates and Columbia’s John C. Coffee Jr., called themselves “deeply skeptical” and argued, “If it ain’t broke, don’t fix it.”
Former SEC enforcement attorney and sharp critic John Reed Stark viewed less disclosure as an attack on the SEC’s “organizing principle” and a letdown for all types of investors. He saw in the overwhelmingly negative feedback “the biggest public rebuke of a rulemaking in the agency’s 92-year history. The SEC chairman’s response? You’re all confused.”
However. majority does not necessarily rule in a regulatory rulemaking. And focusing on the numbers may overlook the merits of positions staked out on either side, as well as both practical and policy implications when some companies may be making less frequent disclosures than others.
According to the SEC, firms reporting semiannually rather than quarterly would save $198,000 annually, a particular inducement for smaller companies.
“This proposal raises competing policy interests,” said the Investment Company Institute’s comment letter. Acknowledging that its “members’ views are nuanced and somewhat mixed,” the ICI recommended maintaining “at least quarterly financial statements and management’s discussion and analysis (MD&A) disclosure. We are open to removing certain current components of Form 10-Q to reduce the burdens of preparing filings while preserving the core benefits of quarterly reporting.”
The U.S. Chamber “echoe[d] the sentiments of [SEC Commissioner Hester] Peirce regarding the focus on content of disclosure rather than the frequency of disclosure.”
Indeed, Fitch Ratings, in a July 9 note, deemed semiannual filing “ratings neutral.” The practice “is widely accepted across developed markets, including Europe, the U.K. and Australia, with minimal impact on Fitch’s ratings.
Rose Liao, Rutgers Business School
“EMEA provides a useful real-world reference point,” Fitch said, noting that “among almost 800 EMEA corporate Issuer Default Ratings, only 2% are notched down for governance reasons, and the primary driver in those cases is ownership concentration rather than financial disclosure concerns.”
But will semiannual reporting boost public listings? The U.K. experience is not encouraging. Rutgers University associate professor of finance Rose Liao said that although the London Stock Exchange saw a dramatic increase in IPO proceeds last year, the number of companies trading is below 1,600, compared with more than 2,400 in 2015.
Less than 10% of U.K. issuers moved to semiannual reporting within two years after the Financial Conduct Authority gave them the chance in 2014, Liao noted. By 2019, 60% had done so.
“The number of U.S. public companies has fallen by approximately 40%,” to about 4,700 from over 7,800 in 1997, Mike Flood of the U.S. Chamber’s Center for Capital Markets Competitiveness told a Senate Banking Committee hearing on August 6. “The costs and burdens of going and staying public have grown substantially over that same period, pushing businesses toward private markets and away from the public markets that have historically served as the great democratizing engine of American wealth creation.”
“For too long, the most dynamic investment opportunities have been available only to those who already have significant wealth,” Flood testified.
SEC Chairman Atkins alluded to a forthcoming series of additional “proposals that, if adopted, will not only redefine what it means to be a public company, but will make being public attractive again.”
Providers of data – specifically alternative data and analytics – stand to gain from a reduced volume of public information when companies can choose to file the semiannual Form 10-S over the quarterly 10-Qs.
NYU Stern School of Business accounting professor Joshua Ronen anticipates an “explosion of alternative data as investors will turn to such sources as credit card patterns, supply-chain metrics and satellite imagery “to bridge the 180-day information gap.”
Rutgers’ Liao pointed out that 10-Q data is in high demand to feed trading models. “Anybody who does back-testing on a quarterly basis would have to question whether those same anomalies and investing factors will continue to work in an environment where we can’t really forecast how many companies will shift to semiannual reporting,” she said.
There would be transition costs, according to Liao, as models would have to be rewritten to accommodate changes, such as how quickly investment signals may fade, and adjusted over time for semiannual reporting.
With optional semiannual reporting, some cross-sectional data that analysts and investors use to compare issuers at a point in time would be out of sync.
“Standardizing trailing-twelve-month (TTM) metrics or running peer-group relative valuations will require heavy statistical imputation, introducing structural model risk into portfolio construction,” Prof. Ronen said.
Joshua Ronen, NYU Stern
He added that MSCI, Standard & Poor’s and other index providers will face hurdles; their regular rebalancings, for example, will require them to use both fresh quarterly data and older data from semiannual filers.
“To prevent tracking errors and accidental biases, index providers will likely have to rely on rolling consensus-analyst estimates to fill in the gaps or restrict major index reconstitutions to a biannual cycle,” Ronen said.
He pointed to “a stark division: Sophisticated institutional funds can afford expensive alternative data feeds, while smaller funds cannot, widening information asymmetry.”
James Angel, a market structure expert who is associate professor at Georgetown University’s McDonough School of Business, stresses the importance of Regulation FD, which requires “fair disclosure” of material information to all stakeholders simultaneously. “It’s questionable how much critical information is actually revealed in [quarterly] statements,” he said.
A recent IBM profit warning was issued ahead of a periodic filing, Angel pointed out, and some companies report key metrics more frequently, as Ford Motor Co. does with sales figures. Exchange companies such as Intercontinental Exchange and CME Group publish monthly volumes.
Angel said that if the proposed semiannual option comes to pass, companies negatively impacted could return to quarterly.
Liao said that an adverse consequence for corporate issuers may be less liquidity for their securities and a higher cost of capital. She pointed to a 2023 study in European Accounting Review of companies listed on the Vienna Stock Exchange. Those terminating or reducing information in quarterly filings since the exchange eliminated that requirement in 2019 experienced a significant reduction in liquidity.
Although the companies continued making disclosures to accommodate the needs of analysts, whose forecasts remained largely unaffected, “these results suggest that a quarterly reporting frequency remains important to investors,” the study found.
Jeffrey Kutler of GARP contributed reporting for this article.