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Should the US move to a six month financial calendar from the current quarterly while President Donald Trump took stock of a tweet early on Friday?
Not exactly, according to many investors and analysts, who claims that shareholders need more information from the companies in which they invest and no less. And while many executives – Elon Musk, someone? – argue that the burden of striving to meet the quarterly estimates can lead to a short term by executives and shareholders, there is no guarantee that a different reporting plan would change that.
"If the accusation is that companies are managing for short-term expectations, what will be the difference between a three-month cycle and a six-month cycle? Nothing," said Leigh Drogen, founder and CEO of Estimize, a platform that estimates estimates of profits and economic forecasts.
"A six-month cycle will also lead to greater volatility, with less access to complex information on the performance of companies," Drogen said.
"I understand the frustration of short-term CEOs [reporting] but the solution is not to hide critical information from investors. [President Trump’s] proposal would increase the cost of capital for public companies and weaken the global competitiveness of our markets" .
Trump said the idea of changing reporting requirements came from PepsiCo Inc. outgoing
PEP, + 0.67%
The managing director Indra Nooyi, a longstanding critic of the current system who claimed that the pressure to achieve the short-term goals obscures the objectives long-term. The president asked the Securities and Exchange Commission to examine the matter.
"I have the results to show for long-term management and the scars to show for short-term management," Nooyi told a group at the annual meeting of the World Economic Forum in Davos, as reported by Business Insider. [19659002] The executive was severely criticized by analysts during the period when he worked to move PepsiCo away from sugary drinks and savory snacks to healthier products with its "Profits with purpose" strategy. After his first five years as CEO, there were requests for his expulsion from the slowdown in sales, the lost earnings of the objectives and the depletion of stocks.
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Nooyi suggested his 12-year mandate as CEO to offer a good case of study for his insistence to take a longer view. According to FactSet, PepsiCo has beaten the earnings estimates of the last 20 quarters, as its strategy has paid off and brought the company back on a growth track.
SEC President Jay Clayton said his agency has already implemented measures to "encourage long-term capital formation while preserving, and in many cases, improving key investor protection".
The SEC division of corporate finance "continues to study reporting requirements for public companies, including frequency of reporting," he said in a statement.
But if the idea is to bring companies to focus on long-term results compared to short-term performance, some believe that increasing the time between three-month reports will not make much of a difference.
"I think it's negligible," said Wayne Thorp, senior vice president and financial analyst at the American Association of Individual Investors. "It's a step in the right direction, but I do not think this can impact so much on the individual investor." It's a real pleasure. "
To be honest, companies would rather not have the weight and expense of quarterly reports, which includes the need to try teleconferencing with analysts. And companies have become experts over the years in the gaming system so as to beat consensus forecasts and enjoy subsequent stock gains.
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This experience has meant that earnings have beaten forecasts at a faster pace over time, as Jill Carey Hall, a quantum shareholder and strategist at Bank of America Merrill Lynch, told MarketWatch in June.
"There is a tendency for companies to set conservative numbers so that EPS beats pass through," Hall said.
Booking Holdings Inc.
BKNG, + 0.90%
The former Priceline, for example, regularly offers a guide to earning, then "beating" that guide when reporting, as previously reported by MarketWatch. See The Sniff Test on the trend of Priceline to set a minimum limit.
Billionaire investor Warren Buffett
BRK.B, + 0.23%
and JP Morgan Chase & Co.
JPM, + 0.05%
The Chief Executive Officer Jamie Dimon argued that companies should stop offering quarterly guidelines and shift their focus on long-term issues. The two executives support the publication of quarterly earnings reports, but believe that the practice of driving for the next quarter creates a short term detrimental to the economy.
"In our experience, the orientation of quarterly earnings often leads to focus on unhealthy short-term profits at the expense of long-term strategy, growth and sustainability," they wrote in a commentary on the Wall. Street Journal.
But John Kay, UK-based economist and author of "Other People's Money: The Real Business of Finance," says it's the practice of reporting every short term that causes a short-term thinking.
"What is changing in three-month intervals does not tell us anything about how a company is positioned to tackle long-term growth," Kay said in a recent interview with MarketWatch.
Read now: Critics say that Buffett-Dimon agrees to end the quarterly orientation will not end the "short term"
Kay has been charged with reviewing the business in the UK equity markets and the impact on long-term performance and governance of listed companies and recommended to eliminate quarterly reports in favor of a semi-annual and progressive guide. His other recommendations included the adoption of an administration code, the establishment of a forum for the collective commitment of investors, the clarification of the fiduciary duties of trustees and their advisors, and the reimbursement to investors of all income from securities lending.
"Earnings reports cut all the noise and that's what investors really need to see, it's easy to get distracted, we need those earnings to keep [investors] on track, to keep them out of the tracks."
The United Kingdom in 2014 abandoned its quarterly reporting obligation, although around 90% of listed companies in the United Kingdom continue to report it this way, many because they are also listed in the United States, most capital markets deep and largest in the world.
The academic world has tried to evaluate the merits of the quarterly reports compared to the half-year reports with mixed results. A paper by Chicago professor Booth Haresh Sapra and colleagues from the University of Illinois at Urbana-Champaign and the University of Minnesota, published in 2014, found that there is a happy medium between insufficient disclosure and too much delivery too often.
"As markets look to the future, any action that favors the short term at the expense of greater long-term value creation would be effectively punished by lower capital market prices," the paper said. Upregulation can be expensive and could make it more attractive for companies to do anything to produce quick profits. "Such pressures disappear when the reporting frequency decreases," the paper found out
But some industry analysts have said that reducing reporting could actually increase costs for companies, as lenders could demand higher interest rates to compensate for the increased uncertainty resulting from less information [19659002] "I understand the frustration of short-term CEOs [reporting] but the solution is not to hide critical information from investors," said Mercer Bullard, professor of Butler Snow and professor of jurisprudence at the University of Mississippi. "[President Trump’s] proposal would increase the cost of capital for public companies and weaken the global competitiveness of our markets."
Karen Cavanaugh, senior market strategist at Voya Investment Management, said that periodic earnings reports are necessary and good for investors, because they provide a checkpoint on how macroeconomic developments such as tax cuts and tariffs, they can influence businesses and the economy.
"Profit reports cut all the noise, and that's what investors really need to see," Cavanaugh said. "It's easy to get distracted, we need those earnings to keep [investors] on track, to keep them out of the tracks."
Howard Berkenblit, partner and head of the financial markets group at the Sullivan & Worcester law firm, agrees that the quarterly reports serve a "useful function" for both companies and investors.
For companies, reporting twice a year instead of four times would save money and resources, but may find it difficult to challenge "speaking freely" to institutional investors and lenders about their business and prospects, unless information has not been fully disclosed to the public, as required by the FD (Fair Disclosure) regulation. And if companies do the work to upgrade investors, it would not be much more expensive to officially divulge information, said Berkenbilt.
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Related: There is a link between CEOs who torture the English language and poor stock performance [19659002] For investors, it is hard to argue that less information is always better than more information. And for small investors, who are not yet able to keep up with the high-speed and algorithmic trading machines that can scrape information from multiple sources in a blink of an eye, they would probably be even more disadvantaged if those programs they would become more aggressive.
"I see it as a difficult sale, since investors and analysts still want this information and may not want to wait that long to know what's going on in a company," Berkenblit said. "Is saving really worthwhile, to the benefit of the investing community that surrenders?"
Drogen of Estimize said long-term planning fans often use Amazon.com Inc.
AMZN, -0.31%
as an example of a company that has been able to prosper despite the many years it has failed to show a profit.
"Investors love to bet on Amazon and Jeff Bezos when it comes to thinking and investing in the long run, but they are seriously mistaken if they believe the market is willing to give that kind of benefit to the doubt to every managerial team" [19659002] "At a time when the risk of technological disruption is increasing significantly, investors need more information in a quicker clip to assess the health of businesses, not less," he said.
Amazon shares gained 60% in 2018, while the S & P 500 index
SPX, + 0.34%
gained 6.3% and the Dow Jones Industrial Average
DJIA, + 0.45%
added 3.6%.
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