Transparency is crucial in business. Not only does a business owner need to know what’s happening, those on the outside looking in need to know as well. Any listed company, regardless of whether it’s based in the UK or US, has an obligation to issue reports. In the US, quarterly reports are mandatory for any public company. The Securities and Exchange Commission (SEC) requires that all financial updates are public so that investors, banking analysts, and anyone else that’s interested can see the details.
In the UK, quarterly reports were mandatory between 2007 and 2014. This change was based on the European Commission’s 2004 Transparency Directive, which required listed companies in Europe to file interim management statements (IMS). The directive was amended in 2013 and, now, companies can file quarterly or semiannual reports.
Short-Term Pressure vs. Long-Term Stability
For several prominent figures in the US, including Hilary Clinton, American companies should follow the European model. In their view, “short-termism” can harm the overall value of a company. By catering to demands on hedge fund managers and issuing quarterly reports, some believe that it causes companies to focus too much on presenting positive short-term targets at the expense of the overarching goals. This topic was the subject of a report by the CFA Institute.
From an investment perspective, quarterly reports are beneficial. For example, an investor looking to trade contracts for differences (CFDs) in a US company will have more readily available data to draw upon before making a move. As an asset class, CFDs are similar to forex in so much as they’re fast-paced. Just as currency fluctuations can lead to multiple trades in a short space of time, CFDs give traders the ability to speculate on the upside and downside. As such, it’s preferable to have greater access to information as a CFD (or forex) trader and analyst.
The CFA Institute’s research supports this argument. When quarterly reporting was no longer mandatory in the UK, fewer than 10% of companies stopped. Those that did experienced a “general decline in the analyst coverage of stoppers.” The implication is that, with less data to analyse, trading forecasts are harder to create and may, potentially, be less accurate. This links to the argument by Clinton et al that US quarterly reports are driven by investment demands and not business demands. However, the CFA’s report also counters the fear that more reporting hurts a company’s long-term profits.
Timing Doesn’t Matter, Coverage Does
As stated in the research, “the frequency of financial reports had no material impact on levels of corporate investment.” What’s more, around 90% of public companies in Europe still produce quarterly reports, despite it not being mandatory. This suggests that major corporations either realise that frequency won’t affect their long-term goals or they’re happy to meet the demands of hedge funds and analysts. In practice, the truth lies somewhere in the middle.
Away from the financials, coverage is king in business. When a company issues a quarterly report, it generates headlines, for better or worse. As the old saying goes, “all press is good press.” A company on a downswing could become a proverbial “sleeping giant” if the media coverage is phrased in the right way. Therefore, in reality, the frequency of reporting likely doesn’t matter. What does matter, however, is investors and their investments. If an example of how important the markets are to businesses was ever needed, the impact of reporting is a great one.