Why the SEC Wants to End Quarterly Earnings Reports

Quarterly earnings season is a fixture on Wall Street, but if Paul Atkins has his way, that could become a thing of the past.

The SEC Chairman called for an end to quarterly earnings reports in an op-ed published this week in the Financial Times. The proposal is the latest example of the agency taking a more deregulatory approach under the current administration, and it followed a social media post earlier this month from President Trump stating that US companies should only have to report earnings twice a year. Experts said the change may also create unexpected outcomes, including hesitancy among investors to participate in public markets.

“It could send a negative message to the market, even if the switch was intended as a cost-saving measure,” said Nathan Hoyt, chief investment officer at Regent Peak Wealth Advisors. “Wary or skeptical investors do not take shifts away from transparency very well.”

Quarter Master 

Atkins argued that quarterly reporting has outlived its usefulness, and getting rid of it would allow companies to cut costs and focus on operations. Quarterly reporting has been standard practice since 1970, when the SEC shifted away from semi-annual disclosures. Countries like the UK and some parts of Europe, as well as some foreign firms listed in the US, already allow twice-a-year disclosures. Some companies still choose to report more often.

Notable names, however, have supported the quarterly reports. Berkshire Hathaway CEO Warren Buffett and JPMorgan Chase CEO Jamie Dimon wrote in 2018 that such reports are “an essential aspect” of public markets. There are also research-backed reasons to believe in their benefits, according to a recent report from NC State’s Poole College of Management:

• Firms’ stock prices are correlated with their accounting numbers, indicating that earnings reports inform investors and drive valuations.
• The US reporting framework makes American capital markets deep enough that startups can raise capital more easily than in other countries.

Report Card. Less frequent reporting could create volatility as investors remain unaware of positive or negative company developments that occurred on a quarterly basis, Hoyt said. The rule change would also impact corporate executives, most of whom are only allowed to trade their company shares once reporting is public.

“Semi-annual reporting would either limit [executives’] trading windows to twice a year or expose them to longer periods of holding material non-public information, and thus room for more bad actors taking advantage of that information,” Hoyt said. Ultimately, however, the market will continue to rely on all available earnings reports, not just the latest ones, which Hoyt said won’t change with the SEC’s new stance.