- The Securities and Exchange Commission (SEC) yesterday proposed giving US companies the option to file financial reports semi-annually, instead of quarterly
- It will canvass public opinion over 60 days (from 5 May)
- The current system works for companies and markets, so some may ask why the need for change
- Many companies may continue to report on a quarterly basis anyway
- What are the arguments for and against changing the requirements?
“America’s financial markets’ regulator, the Securities and Exchange Commission (SEC), is taking its lead from a presidential social media post from last year with a proposal to scrap the requirement for US-listed companies to report on a quarterly basis, but investors could be forgiven if they struggle to find the problem that this apparent solution is trying to address,” says AJ Bell investment director Russ Mould.
“After all, the SEC mandated quarterly reporting in the 1970s and the US stock market and economy have both thrived since then. The transparency provided by the current regime is also one reason why American stocks attract higher valuations than their global counterparts.
Source: LSEG Refinitiv data
“The SEC is going to canvas public opinion for 60 days (from 5 May 2026) before it makes a final decision as to whether it will give American companies the option to report quarterly or shift to the model of interim and full-year results which is more prevalent in the UK, Japan and Europe.
“The UK mandated quarterly reports in 2007, with an interim management statement at the first- and third-quarter stages, only to then scrap this requirement in 2014. A research paper from the CFA Institute Research and Policy Centre (Pozen, Nallareddy and Rajgopal, 2017) found that barely 10% of companies ceased to release quarterly reports when they had the chance.
“As such, the SEC proposal may not lead to a major change in corporate behaviour, not least because those companies that switch to a less frequent publication timetable may be worried about creating a perception they have something to hide, to the detriment of the valuation attributed to their stock and ultimately their share price.
“However, some investors may feel there is a good case for an easing in the rules, given that there are several arguments in favour:
- An easing of reporting and disclosure rules would fit well with President Trump’s desire to cut red tape, deregulate, and potentially free up executives to focus on unlocking growth in the world’s largest economic engine.
- Quarterly reports encourage short-termism, in the form of too much financial engineering and too little product development. Excessive use of debt, share buybacks, cheese paring on costs and (legal) efforts to salt down tax charges all mean that long-term planning and investment can be neglected, to the detriment of the economy’s wider development.
- The number of US listed companies is barely half of the mid-1990s peak of around 8,000, and many are put off by the potentially onerous compliance, disclosure and reporting requirements associated with being a public company.
- The regulatory and reporting burden is particularly hard on smaller companies which are the lifeblood of any economy and the source of potential future stock market stars. A lighter-touch regulatory environment could therefore give more smaller firms access to public capital and allow them to hire and invest, with all the potential future benefits for economic growth that this may entail.
“Nevertheless, there are also clear arguments in favour of retaining the current reporting regime:
- The first is that it works. American firms attract higher valuations than their global counterparts, helped by the reassurance that higher levels of disclosure give to investors, who may in turn be willing to see US firms as less risky and therefore afford them a lower cost of capital as a result. The US stock market sits at all-time highs, so no-one seems to be unhappy with the current reporting requirements.
- In addition, American companies are used to managing the quarterly reporting system, given that they have at least 50 years’ practice and in many cases a lot more than that, since some US listed firms have a record of quarterly reports that dates to the turn of the 20th century. Research from Factset shows that of the S&P 500’s members to have reported thus far this quarter, 81% have beaten analysts’ forecasts for sales and 84% have exceeded earnings expectations. US firms are good at under-promising and over-delivering.
- Investors are accustomed to this smooth level of service too, and, if anything, are happy to extrapolate from near-term numbers to project very-long-term profit forecasts. The lofty valuations attributed to the Magnificent Seven for example, or potentially Anthropic, SpaceX and ChatGPT should they float this year, only make sense if you assume that they generate rapid sales and profit growth, and strong cash flows, for many years to come. In this respect, charges of short-termism make little sense, especially as Pozen, Nallareddy and Rajgopal’s research could find no decrease in corporate investment when the UK briefly switched to quarterly reporting but did find that analyst coverage and accuracy of earnings forecasts did increase during the same period.
- Corporate frauds and failures make headlines because they are rare. The current level of oversight works.
- There is also the risk that this is just the wrong time to be easing regulations, given Warren Buffett’s maxim that financial markets are at their most dangerous when making money looks easiest.
“The latter point ties in to the economist J.K. Galbraith’s analysis of what he called ‘The Bezzle’ in his magisterial analysis of the 1929 Wall Street Crash, as easy money lulls investors into a false sense of security, safeguards are lowered, and malfeasance proliferates. As Galbraith put it:
‘In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.’
“If the US stock market is nearing the end of the bull run, loosening reporting and listing rules and permitting a flood of new initial public offerings could be one way of hastening its demise, at least if history is any guide. As the old saying goes, bull markets end when the money runs out, and one contributory factor to the bursting of the tech, media, and telecoms (TMT) bubble of the late 1990s was a tidal wave of primary and secondary offerings that simply overwhelmed investors.”
