The debate surrounding the frequency of earnings reports has resurfaced in the United States, rekindling discussions about its role in fostering long-term value creation. Former fund managers recognize the allure of adjusting the reporting cadence, yet insights into investor behavior suggest that transitioning to semi-annual reporting has far-reaching implications beyond the issue of short-termism.
Supporters of reduced reporting frequency argue that quarterly disclosures often compel both companies and investors to prioritize immediate outcomes.
Research from McKinsey indicates that this short-term focus can diminish returns on invested capital (ROIC). However, the ramifications for different market participants are intricate, revealing a spectrum of consequences.
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Understanding the implications of semi-annual reports
A shift to semi-annual earnings reporting could result in slower feedback mechanisms, greater variation in the quality of investment decisions, and heightened uncertainty for quantitative models and benchmarks. Experience from portfolio management in the UK, where companies reported bi-annually, indicates that this structure fosters a deeper commitment to long-term strategies while relieving some administrative pressures for all stakeholders.
Transparency and accountability concerns
Nevertheless, diminishing the frequency of earnings disclosures raises concerns regarding transparency. Despite its flaws, quarterly reporting serves as a crucial mechanism through which public investors receive consistent feedback. This structure promotes accountability and allows investment professionals to realign expectations, re-evaluate hypotheses, and reassess assumptions regularly.
Eliminating this rhythm would lengthen the feedback cycle, undermining the industry’s collective learning processes. Data from Essentia shows that the quality of decision-making benefits most from timely, structured, and specific feedback—characteristics inherent in quarterly reports.
Behavioral shifts and market dynamics
Transitioning from quarterly to semi-annual earnings reports represents a substantial behavioral shift aimed at curtailing short-term thinking. However, this shift carries a mix of intended and unintended consequences. For regulatory bodies like the SEC and the Federal Reserve, the removal of quarterly earnings would significantly reduce a crucial data source. The scarcity of corporate information would hinder feedback loops and delay the identification of emerging risks, particularly concerning the prevalence of index funds, algorithmic trading, and rapid capital movements.
Implications for active management and corporate governance
One of the most significant beneficiaries of reduced earnings reporting frequency could be the fundamental active management sector. With less public information available, opportunities for generating alpha would increase, as expertise—whether human or machine—could play a more decisive role. This shift necessitates that fundamental analysts and portfolio managers adapt their research methodologies and model inputs to accommodate longer timeframes, focusing on proprietary investigations.
Conversely, advocates of corporate governance might contend that diminished transparency heightens the risk of inadequate management oversight or potential misconduct. However, considering the existing framework for quarterly internal reporting, responsible management teams are expected to maintain governance practices; they would simply not be obligated to disclose such information every three months.
Challenges for various stakeholders
Quantitative and systematic strategies that rely on continuous updates of reported fundamentals would face significant difficulties in adjusting factor exposures, assessing risks, and validating machine-learning models. Many are likely already strategizing and recalibrating their approaches in anticipation of this shift.
Furthermore, the sell-side may find itself in a precarious position. Much of the activity in equity research, sales, and corporate broking revolves around earnings seasons, and reducing the frequency of these events would diminish trading catalysts. Consequently, there would be fewer opportunities to generate reports, conduct calls, and engage clients.
Supporters of reduced reporting frequency argue that quarterly disclosures often compel both companies and investors to prioritize immediate outcomes. Research from McKinsey indicates that this short-term focus can diminish returns on invested capital (ROIC). However, the ramifications for different market participants are intricate, revealing a spectrum of consequences.0
