Quarterly reporting is usually attributed to corporate shortsightedness, an overemphasis on meeting short-term earnings expectations on the expense of long-term value. Most U.S. firms operate on investment cycles measured in years moderately than quarters, and investors often value stocks based on even longer profit horizons. In this context, changing reporting frequency does little to vary management behavior, while incentive structures – particularly executive pay cycles – place far greater pressure on short-term decisions.
The query for financial analysts is whether or not reducing reporting frequency would improve long-term decision making or just weaken transparency and market efficiency. The evidence shows that this might not be the case and that such a shift would likely impact liquidity and reduce the reliability of knowledge available to the market.
Repetition of the short-term debate
The debate just isn’t latest. The causes and consequences of short-termism have been studied by scholars, commentators, legislators, and practitioners for a long time. Prominent figures like Jamie Dimon and Warren Buffett have done it publicly criticized the culture of short-termism. Their concerns are reinforced by a 2004 survey of monetary managers that found half were willing to forego positive NPV projects to avoid missing quarterly profit expectations1.
Although there may be widespread agreement that short-sighted corporate strategies harm investors and the market, it just isn’t clear that eliminating quarterly reporting would solve the issue. Quarterly reporting and earnings guidance are related to higher analyst coverage, greater liquidity, more transparent information and lower volatility, all of which have a positive impact on the associated fee of capital2, 3, 4, 5. As earnings releases turn into less frequent, information asymmetry increases and the danger of insider trading increases.
The UK and Europe offer current natural experiments. When regulators eliminated mandatory quarterly reporting in 2014, firms didn’t increase their capital expenditures or research and development spending, contrary to what could be expected if quarterly earnings actually resulted in management myopia6.
In addition, some practitioners and academics argue that firms would face less short-term pressure if a bigger portion of their shareholder base consisted of long-term investors. From this attitude, firms that wish to attract such investors should reduce their short-term forecasts and place more emphasis on long-term forecasts.
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Sarah Keohane Williamson and Ariel Babcock, FCLTGlobal (2020)7
Paradoxically, a 2016 study found no difference in long-term investment levels between firms that issued long-term forecasts and those who only provided short-term forecasts8. This highlights the shortage of consensus on how disclosure practices influence management horizons.
This naturally raises the query: What is a long-term horizon for corporate strategy? If the goal of reducing reporting frequency is to curb short-termism, it is cheap to query whether extending the reporting interval by three months would meaningfully influence management decision-making.
When investment horizons exceed reporting cycles
As a primary method to approximate firms’ investment horizons, I classified all publicly traded U.S. firms using the Industry Classification Benchmark (ICB) and used each sector’s two-year average ROIC sales as a proxy for payback periods. This approach provides a practical, albeit simplified, measure of how long it takes for firms to get better their invested capital under stable conditions.
Figure 1: ROIC, ROIC sales and P/E evaluation.
Source: Bloomberg data and our own evaluation (full table within the appendix).
My evaluation shows that the common weighted ROIC for U.S.-listed firms is about five years, with industry averages starting from about three years in the bottom quartile to 22 years in the best quartile. The sample includes 3,355 publicly traded US firms, grouped into 42 ICB sectors and ranked by quartile.
The longer the payback period (ROIC revenue), the less impact a three-month shift in reporting frequency is prone to have on company behavior. Managers would proceed to be under pressure to avoid short-term performance degradation when initiating positive NPV projects; The definition of “short-term” would simply shift from three months to 6 months.
Another short-term perspective is the price-to-earnings (P/E) ratio. The P/E ratio indicates what number of years of current earnings it could take for investors to recoup their original investment, assuming earnings don’t change. For example, an AP/E of 10x implies a profit horizon of 10 years.
High P/E ratios are common amongst growth firms and reflect investors’ expectations of strong future performance through revenue growth or margin improvement. Along with ROIC sales results, P/E multiples help illustrate how investors weigh an organization’s long-term potential relative to short-term returns. In general, firms with a high P/E ratio are under less pressure to deliver short-term results.
Figure 2: ICB sector: ROIC and P/E ratio.
Source: Bloomberg data and our own evaluation (full table attached).
US stocks currently trade at a mean P/E of 42.5x, with sector multiples starting from 12.3x in life insurance to 241x in automobiles and parts. The firms with the best multiples are concentrated within the technology sector – corresponding to Tesla (280x), Palantir (370x), Nvidia (45x), Apple (36x), Meta (21x) and Alphabet (34x) – reflecting strong investor expectations and the influence of AI-related optimism.
Whether or not these valuations reflect a bubble, paying greater than 40 years of earnings suggests that short-term results should not the first driver of investor expectations.
Overall, the evidence suggests that quarterly earnings shouldn’t be blamed for corporate shortsightedness. Several alternative approaches to reducing short-term pressure have been proposed that don’t require the elimination of quarterly reporting9.
The limits of adjusting the frequency of disclosure
One of essentially the most effective ways to scale back short-term pressure could be to increase the length of executive compensation, which is usually structured around a one-year performance cycle10. Such short time horizons don’t fit the multi-year payback periods implied by ROIC and P/E measurements and may create incentives for managers to prioritize short-term results over positive NPV projects. When compensation is closely tied to annual results, postponing value-added investments becomes a rational, if suboptimal, response.
The key query is whether or not less frequent disclosure would help or harm market participants. Reduced reporting is related to lower liquidity, less transparency, higher volatility and better cost of capital, while there may be little evidence that it meaningfully reduces short-term incentives. Given these trade-offs and the supply of other tools to higher align management’s incentives with long-term value, it’s prudent to approach any move away from quarterly reporting with caution.
1 The Economic Impact of Corporate Financial Reporting
3 About leadership and volatility
5 Financial reporting frequency, information asymmetry and price of equity capital
6 Impact of reporting frequency on listed firms within the UK
7 Attract long-term shareholders
8 Long-term profit orientation: Effects on the short-term orientation of managers and investors
9 Curbing short-termism in corporate America: Focus on executive compensation
10 Optimal duration of executive compensation
