The US Securities and Exchange Commission (SEC) is reviewing President Donald Trump’s proposal to introduce a semi-annual model of corporate earnings reporting amidst the suggestions such a move would improve the productivity of US businesses.
Kristian Rouz — US President Donald Trump urged the Securities and Exchange Commission (SEC) to overhaul the practice of corporate profits reporting by phasing out quarterly earnings reports. He said such a move could help US businesses to ‘do even better’.
However, some investors are skeptical, saying lengthier reporting periods could leave stakeholders effectively in the dark and unaware of company growth strategies. This, they say, could hinder US corporate investment and render US equities less appealing to international investors as well.
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Earlier this week, Trump said he held discussions with corporate CEOs, who suggested the SEC could abandon quarterly reporting in favor of semi-annual or annual reporting. This could allow companies to focus on maximizing their operational revenues instead of trying to meet investor expectations every three months, and take the stress out of reporting their revenues.
“I asked what it is that would make business (jobs) even better in the US. “Stop quarterly reporting & go to a six-month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!” Trump tweeted Friday.
The discussion comes as US corporate profits have rebounded in the 1Q18 to $1.92 trln compared to $1.64 trln a year earlier, and a meagre $1.48 trln in 4Q15. This growth in corporate earnings has reflected a stronger economy and consumer demand, coupled with an acceleration in domestic US investment.
However, every earnings season — i.e. once every three months — US companies have felt the pressure of elevated investor expectations, shaped by the upbeat governmental reports and forecasts. Many enterprises have eschewed the notion of taking on risks that could potentially bring higher returns out of the fear they would miss quarterly expectations.
In this light, company CEOs said semi-annual reporting would allow them to employ non-conventional growth strategies more freely, going slightly lower every three months, but posting even better results once every six months.
But some analysts said this could increase investor nervousness, and some companies would take on excessive risks possible leading to disastrous results should something go wrong.
“Cut reporting frequency in half and you invite mischief and remove an established discipline,” David Kotok of Cumberland Advisors in Sarasota, Fla. said.
But Trump appears to be more inclined to trust business CEOs, not least due to his own corporate sector background. Meanwhile, the SEC said it is looking into the matter, scrutinizing the possible positive and negative effects of the proposed move.
Another argument in favor of the proposal is that it would make US businesses more competitive in the international arena, as corporations both in the UK and the EU report their earnings every six months.
However, it can’t be ruled out that a less frequent earnings reporting would encourage malicious behavior due to the corporate sector corruption — which is one of the SEC’s top concerns.
“The SEC’s Division of Corporation Finance continues to study public company reporting requirements, including the frequency of reporting,” SEC Chairman Jay Clayton said. “As always, the SEC welcomes input from companies, investors, and other market participants as our staff considers these important matters.”
Some analysts have warned such a reform could produce gaping loopholes in the system of financial monitoring. Others have said it would invite more risky company behavior, and these risks would inevitably pass on to investors and stakeholders.
Additionally, the US corporate sector would become less transparent, some critics have said.
“I am very confident that less reporting will lead to less public company investment,” David Tawil of Maglan Capital said. “More capital will be channeled to private equity and less-liquid investments. The retail investor will suffer.”
The Trump administration said the proposal comes in line with the President’s policy of deregulation. Officials said the too-frequent reporting is a disincentive which prevents US companies from engaging in longer-term investing — in other words, it’s crippling the Main Street, non-financial sector investment.
Once the SEC review is complete and the measure goes through final approvals, US corporations could start reporting their earnings on a semi-annual basis — and Trump is confident this would enhance business confidence and improve hiring.
At the same time, it is almost certain the US corporate sector would become a slightly more tumultuous environment in such an event, producing higher volatility and profitability in stocks and corporate bonds.