Our research is helping influence a possible move by the Securities and Exchange Commission in the US towards six-monthly corporate reporting.
A paper about Interim Management Statements written by Dr. Thomas Schleicher and Emeritus Professor Martin Walker has been cited in a US Securities and Exchange Commission (SEC) request for comment following pressure from President Trump to “stop quarterly reporting and go to a six month system”.
The SEC has required quarterly reports from US-listed companies since 1971, but in recent years there has been criticism from business leaders saying that it is costly and encourages corporate short-termism, and may even be partly responsible for the dramatic decline in listed companies in the US. They argue that companies are so pre-occupied with the next set of accounts that there is no time left to look at broader strategy.
However those in favour say that the greater transparency protects investors and argue that longer intervals between financial disclosures create more incentive for insider trading.
Trump tweet
President Trump weighed into the debate with a tweet in August 2018 stating that he had asked the SEC to study whether six-monthly reporting would allow greater flexibility and save money.
Initially the SEC seemed reluctant to do anything on the issue. However, just before Christmas it published a call for comment on earnings releases and quarterly reports, specifically asking for information on how it could “reduce administrative and other burdens on reporting companies associated with quarterly reporting while maintaining or enhancing appropriate investor protection".
As part of this Schleicher and Walker’s research was cited in relation to the specific experiences in the EU where the requirement to report on a quarterly basis was removed in 2015.
EU experience
Back in 2013 the EU announced that it was making quarterly reporting voluntary after nine years of mandatory Interim Management Statements (IMSs) for any EU companies admitted to trading on a regulated market.
It argued that IMSs were redundant as they were unlikely to contain any additional information not already required by the Market Abuse Directive (MAD).
The paper, published in 2015 in Accounting and Business Research, and already downloaded 6000 times, specifically looked at the argument that quarterly IMS are unlikely to contain any incremental information and therefore have no impact on investor protection.
In their study, Schleicher and Walker analysed the frequency of non-periodic trading statements pre-and post-IMS, providing evidence on the degree to which periodic and non-periodic disclosures interact with one another. Their findings supported the argument that a regulator’s decision to increase reporting frequency can lead to a withdrawal of a firm’s other disclosures.
They also provided evidence on the extent to which a disclosure regime based on mandatory ad-hoc disclosures, rather than mandatory periodic disclosures, is sufficiently reliable to ensure the release of most relevant information. They found that mandatory ad-hoc disclosures ensure the release of most information which is a “key argument in favour of the decision to formally withdraw IMS in 2015”.
Policy impact
Whilst the inclusion of a financial statement is a key difference between US quarterly reports and the Interim Management Statements previously required under the EU Transparency Directive, the evidence and findings from Schleicher and Walker’s research is clearly of interest to policymakers such as the SEC.
As they are weighing up the costs and benefits of quarterly reporting versus six-monthly reporting this research should go some way to reassure that as long as there are policies in place to require the immediate release of price-sensitive information, six-monthly reporting will ensure the release of most information and be sufficient to protect investors.
Dr Schleicher says there has been a marked interest in their paper since the debate intensified in the US. “The SEC is a key policymaker in the world so this is tremendous profile for Alliance MBS and I am getting dozens of hits every day on the paper online. The interest we have had since the Trump tweet shows the value of our article because there are very few research articles on this subject of reporting frequency.
“This is a really big debate and a big decision for the US to take. Our view remains that quarterly reports can be abolished provided there are requirements in place to report any price sensitive information immediately."
Dr Thomas Schleicher is a Lecturer in Accounting and Finance
