Sometimes, it’s the little things. Sometimes, it’s bigger things. This time it’s the quarterly earnings report required by law of America’s publicly traded companies. And it’s President Trump suggesting on Truth Social that we should do away with quarterly earnings statements in favor of bi-annual statements. He’s right.
The Securities and Exchange Commission (SEC) requires publicly traded companies to report their earnings quarterly. In contrast, the hyper-regulative European Union and United Kingdom require six-month reporting, though corporations are allowed to make quarterly statements if they want.
Quarterly reporting is just one of the hundreds of rules U.S. publicly traded companies face that privately held companies don’t. Nearly all of these rules make some sense in isolation, but collectively they represent an enormous burden, one effect of which is that even as the American economy has grown steadily over the years, the number of publicly traded companies had fallen by half. Houston, we have a problem.
Quarterly reporting is expensive to the corporation and a major time burden for senior management. These are relative nuisances.
The big problem with quarterly reporting is it imposes a long-derided short-term focus on senior management. Successful businesses plan over a long-time horizon while quarterly reporting is necessarily short-term. As Trump queried, “Did you ever hear the statement that, ‘China has a 50- to 100-year focus on management of a company whereas we run our companies on a quarterly basis?’. Not good!”
As with most policy issues, there are trade-offs. The argument for quarterly reports is that investors/owners should have the most recent information on which to make decisions about share pricing and management quality. Hard to argue with that, so then how about weekly reports? There’s nothing sacred about reporting quarterly.
In fact, the investors who really benefit from quarterly reporting season are the short-term traders and speculators. Long-term investors are much less interested or affected.
The top-line argument against quarterly reporting is it distracts management from the long-term focus needed to maximize jobs, growth, and profitability. Actions taken to plump up a quarterly earnings report and therefore the near-term stock price generally come at some cost to long-term planning and investment.
If management is better focused on long-term planning and investment, then the corporation will tend to be more profitable. And who benefits from better long-term corporate earnings? Shareholders, especially long-term investors. So who matters more? The stock pickers or the stock investors?
In short, a practice intended to inform and benefit shareholders largely achieves the former – transparency — and likely on balance does the opposite for the latter. To most shareholders, more information is good, but higher long-term earnings are much, much better.
Investors would further benefit if relaxing the quarterly earnings report requirements meant more businesses would be willing to be publicly traded. As it stands, all investors have many fine corporations to invest in, though far fewer than in years past. But the rich also have well-connected advisors who operate in the “private equity” realm and can plug their rich clients into thousands more great and rapidly growing companies that remain private.
To be sure, relaxing quarterly reporting won’t solve all such issues. Congress and the SEC in particular should go on a crusade to reduce the barriers that keep capital-hungry and growing businesses from going public. But quarterly reporting is a good place to start.
President Trump suggests a bi-annual reporting system. There is no absolute right answer. There are always trade-offs. But six months is better than three and a good place to start.
JD Foster is the former chief economist at the Office of Management and Budget and former chief economist and senior vice president at the U.S. Chamber of Commerce. He now resides in relative freedom in the hills of Idaho.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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