Mandatory quarterly reporting by public companies can lead to a short-sighted focus on near-term results, according to a new academic study.
The study, by Rahul Vashishtha and Mohan Venkatachalam of Duke University’s Fuqua School of Business and Arthur G. Kraft of the Cass Business School of City University London, is set to appear in an upcoming issue of The Accounting Review, published by the American Accounting Association. The professors found that, when new regulatory mandates forced companies to increase the frequency of their financial reporting, they reduced their annual capital investments by around 1.5 to 1.9 percent of their total assets, depending on how the capital investments were defined. The average annual capital investments of those companies totaled approximately 9 percent of assets, so those reductions were hefty cuts.
They contrasted the requirement for quarterly reporting by the U.S. Securities and Exchange Commission with moves in the European Union and the United Kingdom to drop the mandate. “Our evidence…supports the recent decision by the EU and the UK to abandon requiring quarterly reporting for listed companies with an apparent intent to preventing short-termism and promoting long-term investments,” they wrote.
The researchers compared the performance of companies that were forced to increase their reporting frequency with similar companies that had previously been reporting at the mandated interval and didn’t need to change. Before the mandates, companies in the former group (those reporting at longer intervals) had annual sales that were about 10 percent greater as a percentage of assets than sales of the latter group; annual sales growth approximately 3.5 percent greater; and return on assets around 1.5 percent larger. In contrast, in the three to five years after the mandate, as a result of declines in the companies with reduced reporting intervals, sales and sales growth were approximately the same for the two groups, while the difference in return on assets had declined to about 1 percent. The researchers controlled for a variety of factors that might influence the three performance variables, including company size, profitability, leverage and investment opportunities.
They also found investment declines after reporting-frequency increases, especially in industries where capital investment takes some time to generate increased earnings, such as vehicle manufacturing. The declines happened much less, if at all, in industries that typically see earnings gains from investments relatively quickly, such as personal and business services, apparel making and health product manufacturing.