I'm an accounting professor. Semi-annual reporting is a half-baked idea.
President Trump last week suggested on Truth Social that the Security and Exchange Commission should abolish the requirement to report earnings quarterly and instead move to semi-annual reporting. Though reforms are needed to strengthen our financial system, moving to semi-annual reporting is a step in the wrong direction.
Corporate chieftains would certainly cheer a switch to semi-annual reporting: shrouding corporate performance for longer periods of time heightens executives’ information advantage when trading their firm’s securities in their personal accounts. In particular, the public disclosure of bad news would take much longer, and executives would be able to sell stock far in advance of the revelation of trouble.
In an era where income inequality and CEO pay have already reached unprecedented levels, enabling top executives to further pad their net worth is exactly the wrong policy for our country.
In his tweet, Trump claimed that less frequent reporting will “allow managers to focus on properly running their companies.” The idea is that it would alleviate the pressure on CEOs to meet quarterly benchmarks and instead allow them to focus on long-term goals. Realistically, though, adding an extra three months to the reporting cycle is unlikely to make much of a difference to business planning over multi-year horizons.
Moreover, less frequent financial reports will actually make it more expensive for businesses to obtain the capital they need for jobs and growth. Research suggests that when corporate performance is hidden for longer periods of time, investors demand compensation for the increased risk they are exposed to. This creates higher interest rates and lower stock prices, impairing the ability of firms to raise financing and grow — thereby defeating a major goal of the regulatory change.
The pernicious effects of less frequent reporting do not end there. Financial markets will be more volatile and asset prices will decouple from fundamental value. Published research by myself and Emmanuel De George, an associate professor of accounting at University of Miami, shows that because investors will be operating in an information vacuum they will overreact to other types of news that they falsely perceive to be value-relevant. This will create excessive swings in stock prices and damage the efficiency of financial markets.
Regular financial reporting helps create a culture of transparency where executives are responsible stewards of capital, helping align their interests with those of society. Less frequent exposure to the glare of public scrutiny not only weakens transparency, but gives managers greater opportunity to hide mistakes and engage in creative accounting. Financial fraud and Ponzi schemes will be easier to pull off, and Main Street will be left holding the bag.
Trump also claimed that semi-annual reporting “will save money” thanks to lower regulatory compliance expenses. However, any money saved on regulatory compliance is a drop in the bucket compared to the higher cost capital firms will face as well as the detrimental effects of heightened financial market volatility, front-running via executive trading and increased cooking of books.
Trump is not misguided in thinking that we need changes to the financial system. But instead of reducing transparency, the focus needs to be on strengthening corporate governance and oversight. Conflicts of interests in corporate boardrooms should be eliminated. Executive compensation packages should reward long-term value creation instead of short-term performance, and executives should be exposed to downside risk and compensation clawbacks enforced.
In an era where real-time open ledgers via the blockchain are quickly becoming a reality and where capital flows across borders at the speed of light, requiring less frequent reporting is a step into the past. There is little evidence that semi-annual reporting would significantly benefit the economy — in fact, it is likely to do just the opposite.
Salman Arif is a professor of accounting at the University of Minnesota.