Every three months, thousands of public companies, both large and small, are required to report their earnings, providing investors with crucial updates about their financial health. This practice, however, has drawn the ire of many executives who argue that it is not only costly but also burdensome. They contend that the focus on quarterly earnings pushes companies to prioritize short-term gains over sustainable long-term strategies. Recently, former President Donald Trump voiced support for a significant change in this practice.
In a recent social media post, Trump proposed that companies should report their earnings every six months instead of the current quarterly requirement. He believes this change would be beneficial for the nation, suggesting that it would not only save money but also allow managers to concentrate on effectively running their businesses. Trump emphasized the contrast between the U.S. approach and that of China, which he claimed adopts a long-term perspective on management, spanning 50 to 100 years. He expressed concern over the negative implications of a system that mandates quarterly reports, stating, "Not good!!!"
Despite Trump's advocacy for semi-annual earnings reports, many investor advocates and financial experts have expressed alarm over the potential consequences. Critics argue that reducing the frequency of disclosures could lead to diminished transparency in the marketplace. Companies would have the opportunity to withhold important financial information for up to six months, which could harm investor trust and market integrity.
Prof. Salman Arif from the University of Minnesota's Carlson School of Management cautioned that moving to biannual reporting could increase the risk of illegal activities. He stated that less frequent updates would provide fewer opportunities for investors to scrutinize financial data, potentially paving the way for accounting fraud and insider trading. "If we want to reduce accounting fraud, reduce opportunities for insider trading, improve the strength of our capital markets, and allow companies to invest for the long run, I think more transparency is truly beneficial," Arif noted.
The Securities and Exchange Commission (SEC), the primary regulator overseeing stock markets, has mandated quarterly earnings reports since 1970. Larger companies often supplement these reports with investor calls, where executives answer questions from analysts and provide forward-looking guidance. These earnings calls can significantly impact share prices, leading to sharp declines if results fall short of expectations or substantial increases if companies outperform. Executives have long argued that the pressure of quarterly evaluations fosters a short-term mindset, overshadowing the need for long-term growth and sustainability.
The Business Roundtable, representing over 200 major U.S. corporations, has also advocated for less frequent earnings disclosures. They argue that the current system encourages an unhealthy focus on short-term profits at the expense of developing robust long-term strategies.
Finance experts warn that quarterly updates serve as a critical check on corporate behavior. Prof. Arif emphasized that delaying earnings reports could lead to heightened volatility in share prices, as investors would have access to less information and be more susceptible to surprises. "Disclosure is a type of truth-telling," he stated. "You're trying to reveal what's happening behind the scenes. If you don't have to do that very often, there's just more chance that the few numbers you do report could be manipulated more easily."
Despite Trump's call for less frequent earnings disclosures, any significant change in how U.S. public companies report their earnings is likely to be a lengthy process. During his previous term, Trump similarly advocated for reducing the frequency of earnings reports, but the SEC did not take substantial action on the proposal. As of now, the SEC has not responded to requests for comment on the matter.
Altering the decades-long practice of quarterly earnings reporting would require extensive consultation and debate, and any changes are unlikely to be implemented in the near future. The ongoing discussion surrounding this issue continues to highlight the balance between corporate transparency and the pressures of the financial markets.
