Trump is wrong. Nixing quarterly reports won’t fix Wall Street’s ‘short-termism’

Here we go again.

U.S. President Donald Trump is reviving yet another failed idea from his first term in the Oval Office by reiterating a call for American public companies to cease disclosing financial results every quarter, and instead move to a semi-annual reporting schedule.

Just like in 2018, Mr. Trump took to social media to signal his desire to do away with quarterly capitalism. Conveying his plans in a post on his Truth Social platform, he said the shift was subject to approval from the Securities and Exchange Commission, or the SEC.

“This will save money, and allow managers to focus on properly running their companies,” Mr. Trump stated in his post on Monday.

Bizarrely, he also suggested that the United States ought to emulate China.

“Did you ever hear the statement that, ‘China has a 50 to 100 year view on management of a company, whereas we run our companies on a quarterly basis???’ Not good!!!”

Since when is China a model of modern capitalism? Yikes.

Trump renews call to switch to six-month reporting period for companies

Opinion: Trump is right: Semi-annual earnings reports make a lot of sense, and for Canadian stocks too

Although the SEC previously studied – and subsequently rejected – a similar request from Mr. Trump in 2018, he may well get his way this time.

The idea is garnering renewed support from some players in corporate America. What’s more, the rekindled debate coincides with increased deference from the national securities regulator.

SEC chairman Paul Atkins has been downright cavalier in rejecting concerns about political interference from the White House, bluntly stating that he views the regulator as “part of the executive branch” of the U.S. government.

Having conceded that his own job is likely on the line, Mr. Atkins is unapologetically taking his cues from Mr. Trump and moving to narrow the scope of the SEC’s enforcement activities.

To be clear, the tendency of C-suite executives to unduly focus on achieving near-term profits over long-term corporate objectives is a problem. That obsession with beating the street, coupled with sycophantic analyst chatter on quarterly conference calls (“Great quarter, guys!”), does a disservice to businesses and investors alike.

But withholding timely information from the market isn’t the solution to Wall Street’s “short-termism.” In fact, it could very well backfire by undermining confidence in U.S. capital markets.

Quarterly reporting has been accepted practice in the U.S. since 1970, and over the ensuing 55 years, investors have grown accustomed to regular disclosures from companies.

Modern-day investors are rightly demanding more, not less, information – and with good reason. Accounting scandals such as Enron, WorldCom and Lehman Brothers all occurred in recent decades.

Mr. Trump’s proposal to turn back the clock to 1955, when the SEC only required semi-annual reporting from companies, would give added cover to corporate fraudsters and encourage more insider trading.

That, in turn, will ultimately drive up the cost of capital for companies and undermine the integrity of U.S. equity markets.

Think it can’t happen? Think again. The U.S. has already achieved its worst-ever score on Transparency International’s global Corruption Perceptions Index.

If the SEC mandates even less transparency from U.S. public companies in the digital age of investing, it will absolutely result in higher risk premiums and lower stock prices.

“As companies report on a more frequent basis, investors can more appropriately price in risk and feel more confident about equity markets,” states an analysis from Brown University in 2018.

An information vacuum will also fuel more volatile swings in share prices when companies report their results, especially if they miss analysts’ expectations.

Mr. Trump’s shout-out to China notwithstanding, proponents of semi-annual reporting point to the utility of harmonizing U.S. reporting practices with those in more comparable jurisdictions.

Britain, for instance, stopped mandatory quarterly reporting in 2014, but many companies maintained the practice anyway.

Importantly, a separate analysis by the CFA Institute Research Foundation, published in 2017, cast doubt on whether the shift in Britain actually achieved more long-term investments by companies.

Specifically, it concluded there was “no statistically significant difference” between the levels of corporate investment by companies that scrapped quarterly reports and those that continued issuing them.

That brings us back to the latest presidential proposal and the business record of the man behind it.

Maintaining a quarterly reporting requirement is part and parcel of the SEC’s responsibility to ensure investors receive timely and accurate information.

That also includes going after companies that put out earnings announcements that use bogus accounting to mislead investors and boost their short-term stock price.

It’s worth recalling that one of the pioneering SEC enforcement actions in that regard was in 2002, against a company that may be familiar: Trump Hotels & Casino Resorts.