More frequent financial reporting benefits investors

When it comes to financial reporting, how much information is too much? Public companies in the U.S. file reports every three months to comply with Securities and Exchange Commission rules.

Some critics say this happens too often, arguing that companies focus too much on short-term financial results and too little on long-term activities like research and development. The European Union eliminated the quarterly requirement in 2013. The SEC considered a similar move in 2018, though the agency ultimately rejected it.

But new research by Yong Yu, a professor of accounting at Texas McCombs, provides evidence for quarterly corporate reporting. It finds that more frequent reporting helps investors.

In his opinion, when companies publish financial results more frequently:

• Additional information allows investors to better predict future earnings and price stocks more effectively.
• Companies voluntarily disclose additional information.

“There are benefits to more frequent reporting,” Yu says. “Investors get more information, which can help price the stock more efficiently.”

Making Switches

Yu—along with Jenna D’Adduzio of the University of British Columbia, David Koo of George Mason University, and Santhosh Ramalingegowda of the University of Georgia—set out to see if the data could help resolve the frequency debate.

The data covered the period from 1954 to 1972, during which several waves of U.S. companies moved from once- or twice-yearly reporting to quarterly reporting. Some did so because of SEC mandates and some because of pressure from the American Stock Exchange.

The researchers conducted a before-and-after comparison, matching 201 companies that switched to more frequent reporting with a control group of companies that already reported more frequently. For each company, they measured how closely current stock returns correlated with future earnings.

Before the change, the returns of companies in the first group were 36% less predictable with respect to long-term earnings compared to the returns of the control group.

After the change, when companies began reporting more frequently, their returns became better correlated. They were only 7% less predictive than those of the control group.

In other words, Yu says investors were better at forecasting long-term earnings and factoring them into current stock prices.

More is better, to some extent

The results have practical implications for both SEC policymakers and investors, Yu says. Investors should rest assured that when it comes to financial reporting, more information appears to be a good thing.

Policymakers need to balance the benefits to investors of frequent reporting with the higher costs to companies – especially smaller businesses – and concerns about focusing too much on short-term results.

One option, he suggests, could be to allow different frequencies for different types of companies. The SEC could ease reporting requirements for smaller companies or those in more volatile industries, while maintaining more frequent reporting requirements for others. Yu says: “Maybe somewhere in between is really the best thing policymakers can do.”

The results were published in the journal Accounting horizons.