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
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021
Stock Market Holidays in 2021
Markets

Stock Market Holidays in 2021

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2021.
September 2, 2021

Recommended

These 2 Emotional Biases Could Kill Your Retirement
Investor Psychology

These 2 Emotional Biases Could Kill Your Retirement

Are your emotions sabotaging your retirement plans? Some basic knowledge and careful introspection can go a long way toward avoiding major pitfalls.
September 20, 2021
Investment Strategies for the 4 Stages of the Economic Cycle
Markets

Investment Strategies for the 4 Stages of the Economic Cycle

The U.S. economy is cyclical in nature, surging ahead and pulling back in waves over time. Investors’ portfolios need to change with the rise and the …
September 19, 2021
Is a Target Date Fund Right for You?
investing

Is a Target Date Fund Right for You?

You're busy, and poring over investments is a pain. Wouldn't a target date fund be easier? Take a look at their pros and cons to see if incorporating …
September 14, 2021
Is the Stock Market Closed on Labor Day?
Markets

Is the Stock Market Closed on Labor Day?

Stock markets and bond markets alike will enjoy their annual three-day weekend as America observes Labor Day.
September 5, 2021