The S.E.C. should report corporate earnings less frequently, according to President Trump. It’s a sensible attempt, but at a risky moment, according to our columnist.
Everything has its proper time. Now is not the time to make it even more difficult to find trustworthy information about the economy and markets.
Important reports, such as one on jobs and unemployment, are just unavailable due to the government shutdown. The Trump administration had been making it harder for the public to access reliable official data on a variety of topics even prior to the shutdown.
In August, President Trump dismissed the head of the Bureau of Labor Statistics because he disapproved of the agency’s employment statistics. For many other topics as well, such as deportations, pollution emissions, and the expense of severe storms, accurate data is becoming increasingly difficult to come by.
More data cuts are the last thing we need right now.
However, President Trump wants to cut off another valuable source of information: publicly traded corporations’ quarterly earnings reports.
The Securities and Exchange Commission has been urged by the president to do away with the requirement that publicly traded corporations submit their profit reports on a quarterly basis. Additionally, the agency’s chair, Paul Atkins, declared Monday that he would “fast track” the president’s wish to change corporate America’s reporting cycle from quarterly to twice-yearly. This “will save money, and allow managers to focus on properly running their companies,” according to Mr. Trump.
This might be a sensible concept at another time. Why not give it a go in the US? After all, the European Union and Britain have already tried it out without experiencing financial catastrophes.
During the shutdown, earnings reports are still being released. However, if you’ve worked for a publicly traded firm and heard or made complaints about the strain of gathering data and presenting it for the markets and regulators every three months, you might find the idea of lowering the frequency of these reports intriguing. Without a doubt, businesses would find it easier if they were not required to. It might theoretically free up executives’ time for long-term planning.
However, in nations where it has been implemented, a number of studies have revealed no appreciable gains in business planning or performance. Furthermore, it is being proposed in conjunction with the closure of official data sources and a relaxation of financial rules and enforcement, which is particularly concerning in the United States. The hundreds of corporations that make up the stock market and have an impact on our daily lives would be less familiar to the average person.
John Coates, a Harvard Law professor and former S.E.C. official, stated in an interview that the quarterly results of publicly traded corporations serve as a standard for the whole economy. We would be even more in the dark if there were no reliable, regularly released information.
Things We Would Miss
It might be difficult to love corporate earnings releases. However, they offer insightful information about the conduct of specific businesses and can be utilized to evaluate the state of large sectors of the economy.
For instance, it was evident that, at least up until that time, the S&P 500 firms’ overall earnings had been strong, and that strong earnings performance has persisted, even in the midst of the market chaos caused by Mr. Trump’s “Liberation Day” tariffs in April. According to FactSet, 52 percent of S&P 500 firms had raised their profit margins over the previous year through the second quarter, despite tariffs and uncertainty on many fronts.
Additional information was revealed by earnings reports. Seventy percent of businesses in the communications and financial services sectors saw an improvement in their profit margins. Only 22% of energy companies reported better margins, on the other end of the spectrum. The resilience of a large portion of the economy, the bull market in stocks, and the underwhelming performance of energy firms like Exxon Mobil are all explained by statistics like these.
Since 1970, when it became the U.S. standard, journalists, investors, scholars, and financial analysts have grown to rely on this quarterly data flow. Losing quarterly earnings would be devastating, especially because so much else is going dark and the administration frequently introduces shocking new regulations.
A voluntary decrease in executives’ “quarterly guidance,” or projections, about the performance of their companies would not be painful. In a 2018 Wall Street Journal column, Jamie Dimon of JPMorgan Chase and Warren Buffett of Berkshire Hathaway suggested this modification. Businesses frequently utilize these projections to influence financial experts’ expectations, resulting in “positive surprises” that cause stock rallies when earnings reports finally arrive.
In 2013, I reported about this ceremonial dance between analysts and executives. It was, and still is, ridiculous. Investors might benefit from ending the dance, but it has nothing to do with Mr. Trump’s plan to reduce the number of earnings reports.
The Experience of Europe
Let’s have an open mind. The quarterly schedule isn’t infallible. The possibilities for additional rhythms are endless. The S.E.C. mandated semiannual reporting from 1955 to 1970, and many American businesses did not submit quarterly corporate earnings reports.
Furthermore, just semiannual reporting is currently necessary in the UK and the EU. There is no proof in any country that the lenient schedule has resulted in widespread fraud or prevented investors from evaluating the quality of businesses or the health of economies. (But keep in mind that, unlike in the US, there is no threat to the public’s access to copious amounts of trustworthy government economic data in these countries.)
In September, Goldman Sachs discovered that while public companies in the European Union “have been roughly equally split between semiannual and quarterly reporting frequencies,” almost all corporations in Britain have opted to report semiannually. This 50/50 split was reflected in the European stock index, the Stoxx 600. The index was utilized as a “natural experiment” by Goldman researchers under the direction of Sharon Bell. They discovered “no material difference” in return on equity, which calculates how much a company makes for each dollar invested by shareholders, or stock values.
Public Confidence
According to a 2017 study conducted for the nonprofit CFA Institute Research Foundation, corporate managers in Britain did not adopt a longer-term perspective as a result of the switch to semiannual reporting, unlike what Mr. Trump has claimed. The study was headed by Robert Pozen, a distinguished lecturer at the MIT Sloan School of Management and a former president of Fidelity.
“You would expect that capital investment would increase along with research and development if they had more long-term thinking.” In an interview, Mr. Pozen stated, “But neither was true.” However, he also noted that “stock market volatility went up,” most likely as a result of extended periods of little information about the companies, which caused the market to react sharply when it did. “That’s a significant expense for investors,” he stated.
According to Mr. Pozen, if the US switched to semiannual reporting, investors and the general public would suffer a significant loss today. “A black hole for data is already in our sights. It would be far worse as a result.
“One change would help if the goal is to improve the long-term thinking of chief executives,” he said.
This would involve changing the typical executive compensation package structure to award CEOs according to the company’s performance over the previous three or five years. Mr. Pozen claimed that the current procedure is “basically paying the executives on last year’s performance”—generating astronomically high payouts without guaranteeing that the long-term interests of shareholders are safeguarded. But neither Mr. Trump nor the S.E.C. are suggesting such a move.
The specifics are important, if the administration moves forward with its existing intentions. How would corporate reporting change in the future? A lot of the information might continue to flow as it does now due to market pressure. Not all businesses would stop reporting on a quarterly basis, but some would. Without a doubt, we could anticipate that information would become considerably more valuable than it is now.
That would increase the advantage of well-positioned investors and increase the vulnerability of everyone else. For long-term investors, holding a portion of all publicly traded markets through diversified index funds would likely remain the best option. However, if regulation weakened and openness became a pipe dream, public market trust would decline.