Looking to the Futures

The president originally advocated for this change during his first term in 2018. The SEC, then led by Jay Clayton, solicited public comments on the matter. However, an already full agenda and the outbreak of the Covid-19 pandemic taking over all government priorities, no changes were ever implemented. He is not the first U.S. president to push for less frequent reporting either. Barrack Obama made a case for it back in 2015. 

President Trump’s post cited cutting costs and allowing management to shift more to a long-term focus as primary reasons for the change. 

Advocates of quarterly reporting claim the more frequent reports are critical to the transparency of the markets and keeping investors informed while reducing the opportunity for market manipulation. 

Critics of the current system say the frequent reporting incentivizes management to focus on short-term results over long-term results and often leads to overreactions by investors. 

CEO and chair of Nasdaq Inc., Adena Friedman, has publicly supported decreasing the reporting to every 6 months to reduce the burden on companies. The U.S. exchange published a policy paper last year advocating for the change. 

In Europe, companies are only required to file financial reports every six months. Although, many of the larger companies still choose to report every quarter to ensure analyst coverage and avoid sending a possibly negative signal to the market. 

A natural experiment was done in the U.K. over the last couple decades. The United Kingdom switched from semiannual reporting to quarterly reporting in 2007 and then switched back to semiannual reporting in 2014. A CFA study found no significant changes in capital expenditures or research and development from either of those changes. This is a knock for those saying that less frequent reporting will encourage a longer-term focus. It is also only one data point. Notably, 90% of U.K. public companies opt to report their financials every quarter even thought the requirement only demands every 6 months. Smaller firms were more likely to take advantage of the new rule and switch to semiannual reporting. 

The benefits of going public have diminished over the last couple decades. The rise of private credit and private equity have given companies more options to obtain the cash to fund their growth. Companies are going public later in their cycles and many are opting to stay out of the public sector and all its scrutiny completely. 

There were over 6,500 publicly listed companies in the Untied States at the end of the 20^th century. As of last year, there are only 4,700 publicly traded U.S. companies. A whitepaper by Meketa published a year ago revealed mergers and acquisitions were the most cited reason for a company’s delisting. They also cite the increased regulatory burdens as inhibiting companies from going public. 

PricewaterhouseCoopers estimated in that report that on average companies spend over $1 million each year just to be a public company. The costs and burden of reporting vary widely, with larger and more complex companies spending much more. A metric from CFO.com last year used data from the American Productivity & Quality Center (APQC) estimated companies spend around .04% of their revenue on financial reporting. While a 2022 study by Drexel University’s LeBow College of Business estimated U.S. public companies spend 0.3% of their EBITA (Earnings Before Interest, Taxes, Deprecation, & Amortization) on reporting. 

Will less frequent reporting tip the scales and incentivize more companies to go public? It is hard to say, but it couldn’t hurt.