investing

Is President Trump Right About Why Quarterly Earnings Reports Are Wrong?

Requiring companies to post results too often may discourage long-term investment, but requiring them to report too little can leave investors in the dark for too long.

Kiplinger’s spoke with Charles K. Whitehead, a professor at Cornell Law School who specializes in corporations, financial markets and business transactions. Read on for an excerpt from our interview:

President Trump recently asked the Securities and Exchange Commission to study whether publicly traded companies should report earnings on a six-month basis. What’s the problem with quarterly reporting? You manage what you measure. When you’re assessed on three-month results, you’re going to focus on hitting three-month numbers. Company executives don’t think about three years down the line; they think about the company three months down the line. That’s not very healthy.

Would a move to six-month reporting reduce short-term thinking? It could help. Reviewing and signing off on the Form 10-Q, getting on the phone with reporters, dealing with the brouhaha of press reports and analyst commentary—all of that chews up time. Having to do that twice a year rather than four times frees up resources. And there is some historical evidence that investments by companies in longer-term projects (for example, research and development) dropped slightly when quarterly reporting was introduced in 1970.

What else contributes to the short-term thinking? When companies release forecasts of their upcoming quarterly earnings, which isn’t required by the SEC, and then fail to hit that number, the result can be devastating for the company.

Another factor is the average tenure for CEOs is declining. If you’re a CEO, are you thinking eight years out if your firm’s average term is six years? Maybe not so much.

What would be the downside of less-frequent reporting? The cost is less information in the public marketplace, and that has ramifications. Giving investors less information to act on would likely increase speculation in the stock market. Executives, then, would face even greater pressure to avoid showing, say, a short-term decrease in profits, even if the company is spending for a future project.

What should investors take away from the President’s message to the SEC? The White House, the SEC and even some prominent Democrats are interested in a longer-term approach to corporate management. But none of these factors, be it quarterly reporting or earnings guidance or CEO tenure, will solve the problem in isolation. All those things need to be wrestled with. It’s going to be a long time coming.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Can't Sleep at Night? Consider Getting Checked Out By a Doctor
health insurance

Can't Sleep at Night? Consider Getting Checked Out By a Doctor

Older adults are more likely to suffer from sleep disorders, such as insomnia and sleep apnea. Left untreated these conditions can have dire consequen…
May 26, 2021
Midyear Investing Outlook: Where to Invest Now
Kiplinger's Investing Outlook

Midyear Investing Outlook: Where to Invest Now

After a powerful start, stocks will grind higher in the second half of 2021. But watch out for curveballs.
May 23, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Is the Stock Market Closed on Memorial Day 2021?
Markets

Is the Stock Market Closed on Memorial Day 2021?

The stock market gets a full day off for Memorial Day. The bond market gets Monday off too, not to mention an early close ahead of the holiday weekend…
May 30, 2021
What Time Is the Stock Market Open Today?
Markets

What Time Is the Stock Market Open Today?

When does the stock market open? While the market does have regular hours, trading doesn't stop when the major exchanges close.
May 28, 2021
Bonds: Be Choosy for the Rest of 2021
Investing for Income

Bonds: Be Choosy for the Rest of 2021

Enough good things are happening in the economy and some fixed-income sectors (perhaps not T-bonds) to imply better second-half prospects.
May 26, 2021