The query of whether or not quarterly earnings reporting helps or harms long-term worth creation has returned to the US coverage agenda. As a former fund supervisor, I can recognize the enchantment, however as somebody who at the moment spends her days analyzing investor decision-making knowledge, I see the implications of a shift to semi-annual reporting as far broader than the acquainted short-termism argument suggests. Lowering the cadence of earnings releases would quantity to a serious behavioral intervention in how market practitioners study, recalibrate, and compete.
Whereas proponents argue that quarterly disclosure causes each corporations and traders to fixate on short-term outcomes (McKinsey analysis hyperlinks short-term focus to decrease ROIC[1]), the market penalties for funding professionals are extra complicated and refined than this implies — with completely different implications for various events.
From an enormous image perspective, shifting to a semi-annual earnings cycle would doubtless gradual suggestions loops, widen the dispersion in funding determination high quality, shift informational benefit, and enhance uncertainty for quantitative fashions and benchmarks.
Having been a portfolio supervisor in the UK when corporations reported solely twice a yr, I recall how way more fulfilling elementary investing was underneath that construction. We genuinely thought longer-term, and the executive burden was lighter for everybody concerned, so I can recognize the argument for making the change.
Nevertheless, as somebody who now spends her days distilling helpful insights from knowledge, my intuition is that eradicating quarterly earnings would scale back transparency in a approach the business can sick afford. For all its flaws, quarterly reporting stays one of many few structured suggestions mechanisms obtainable to public traders. It anchors accountability and provides practitioners a daily alternative to recalibrate expectations, take a look at hypotheses, and revisit assumptions.
Eliminating that rhythm would lengthen the suggestions cycle and weaken the business’s collective studying mechanism. Essentia’s knowledge present that decision-making high quality improves most when suggestions is well timed, structured, and particular, exactly the qualities quarterly reporting delivers.
Winners, Losers, and Unintended Penalties
Shifting from quarterly to semi-annual earnings studies could be a big behavioral intervention, designed to scale back short-termism however sure to hold a variety of meant and unintended penalties.
For regulators such because the SEC, the Fed, and different screens of systemic danger, eliminating quarterly earnings would imply a 50% discount in a knowledge supply they depend on closely. Much less frequent company data would gradual suggestions loops and will delay the detection of rising dangers, a regarding dynamic in an period of index funds, algorithmic buying and selling, and speedy capital motion.
Maybe the most important winner from a lengthening of the cadence of earnings studies could be the elemental energetic fund administration business.
It is usually laborious to think about firm administration being something aside from happy by the prospect of less-frequent public reporting. It could really feel like a windfall to decision-makers who need extra room to give attention to long-term technique reasonably than on managing the share worth every quarter. It would even assist revive the ailing IPO market, the place the reporting burden related to quarterly earnings stays a significant deterrent to going public.
Company governance advocates would argue (and I’d agree) that decreased transparency will increase the chance of poor administration and even malfeasance going unnoticed. That stated, with the infrastructure already in place for quarterly inside reporting, there’s little motive to assume that well-intentioned administration groups would neglect governance; they merely wouldn’t face the burden of reporting it publicly each three months.
Quant and systematic methods that rely on a steady movement of reported fundamentals to recalibrate issue exposures, forecast danger, and validate machine-learning inputs would face clear challenges. That stated, many are doubtless already operating eventualities and adjusting their issue development and risk-monitoring practices in anticipation of such a shift.
Maybe the most important winner from a lengthening of the cadence of earnings studies could be the elemental energetic fund administration business. Much less frequent public data means extra room for alpha technology: more room for experience to make a distinction, whether or not that experience comes within the type of a human, a pc or, more and more, a mixture of each. That is an setting the place elementary analysts and PMs should regulate their analysis cycles and mannequin inputs to a extra prolonged timeline, prioritizing proprietary analysis.
Quant and systematic methods that rely on a steady movement of reported fundamentals to recalibrate issue exposures, forecast danger, and validate machine-learning inputs would face clear challenges. That stated, many are doubtless already operating eventualities and adjusting their issue development and risk-monitoring practices in anticipation of such a shift.
Anybody whose product depends on frequent disclosures to guage governance, compensation alignment, and ESG progress would doubtless undergo.
Various knowledge suppliers would doubtless see an acceleration in demand as companies redeploy the time and assets at the moment dedicated to earnings processing into knowledge that may illuminate the gaps left by less-frequent disclosure. Against this, suppliers whose merchandise depend on common filings to guage governance, compensation alignment, and ESG progress would face clear challenges.
It’s much less clear whether or not the sell-side could be a internet winner or loser. A lot of fairness analysis, gross sales, and company broking exercise is anchored round earnings season, and with out that occasion, buying and selling catalysts would diminish. Halving the frequency of formal outcomes would imply fewer alternatives to publish notes, host calls, and seize consumer consideration.
The monetary media would additionally lose a key driver of readership and engagement. A slower cadence would shift narrative energy from reported knowledge to hypothesis, doubtlessly lowering accountability for each journalists and analysts.
Might fewer public earnings calls assist protect the roles of fairness analysis analysts? The specter of AI to junior analysts stays, however the experience inside the seasoned sell-side neighborhood may grow to be extra beneficial. Figuring out which inquiries to ask and which knowledge to research between formal earnings bulletins is an skilled analyst’s stock-in-trade, and a slower cadence may reinforce the significance of that ability set.
In an identical vein, much less frequent and standardized disclosures would create challenges for the passive funding ecosystem, which relies on common, standardized reporting to keep up index accuracy and benchmark integrity. Allocators and institutional managers utilizing these merchandise would face better staleness danger in index composition and weighting, notably in risky markets, rising the chance of monitoring error.
Decreased transparency would make passive investing riskier, weakening one in every of its core worth propositions.
In the end, the controversy over quarterly versus semi-annual reporting shouldn’t be solely about disclosure cadence however about suggestions loops, incentives, and conduct. Slowing that rhythm might commerce some transparency for depth of thought. The clear practitioner takeaway is that this: Whatever the reporting frequency, success will rely on disciplined funding decision-making, efficient course of monitoring, and the power to make use of various knowledge and suggestions sources to fill informational gaps.
[1] McKinsey & Firm and FCLTGlobal, Company Lengthy-Time period Behaviors: How CEOs and Boards Drive Sustained Worth Creation (October 2020), p. 36.