The query of whether quarterly earnings reporting helps or hurts long-term value creation has returned to the U.S. political agenda. As a former fund manager, I appreciate the appeal, but as someone who currently spends his days analyzing data to tell investor decision-making, I see the impact of a move to semi-annual reporting far broader than the familiar short-termism argument suggests. Reducing the frequency of earnings releases would represent a significant behavioral intervention in the best way market participants learn, recalibrate and compete.
While proponents argue that quarterly disclosure causes each corporations and investors to concentrate on short-term results (McKinsey research links short-term focus to lower ROIC).[1]), the market consequences for investment professionals are more complex and subtle than this means – with different implications for various parties.
From an overall perspective, moving to a semi-annual earnings cycle would likely slow feedback loops, increase dispersion in the standard of investment decisions, shift the knowledge advantage, and increase uncertainty for quantitative models and benchmarks.
I worked as a portfolio manager within the UK when corporations only reported twice a yr. I remember how rather more fun fundamental investing was on this structure. We really took a longer-term view and the executive burden was reduced for everybody involved, so I can understand the arguments for the change.
However, as someone who now spends his days extracting useful insights from data, I think that removing quarterly earnings would cut back transparency in a way that the industry can sick afford. Despite its shortcomings, quarterly reporting stays certainly one of the few structured feedback mechanisms available to public investors. It anchors accountability and provides practitioners with regular opportunities to recalibrate expectations, test hypotheses, and reconsider assumptions.
Eliminating this rhythm would lengthen the feedback cycle and weaken the industry’s collective learning mechanism. Essentia’s data shows that the standard of decision-making improves most when feedback is timely, structured and specific – the very qualities that quarterly reporting delivers.
Winners, losers and unintended consequences
Transitioning from quarterly to semi-annual earnings reports can be a major behavioral intervention designed to scale back short-termism, but is bound to have a variety of intended and unintended consequences.
For regulators just like the SEC, the Fed and other observers of systemic risk, eliminating quarterly results would mean a 50% reduction in the information source they rely heavily on. Less frequent corporate information would slow feedback loops and will delay the identification of emerging risks, a worrying dynamic within the age of index funds, algorithmic trading and rapid capital movements.
It’s also hard to assume Corporate management anything but pleased in regards to the prospect of less frequent public reporting. It would feel like a godsend for decision makers who want more leeway to concentrate on long-term strategy moderately than worrying about managing stock price on a quarterly basis. It could even help revive the struggling IPO market, where the reporting burden related to quarterly results stays a major deterrent to going public.
Corporate governance advocates would argue (and I agree) that reduced transparency increases the chance that poor management and even misconduct will go unnoticed. However, provided that the infrastructure for quarterly internal reporting is already in place, there’s little reason to imagine that well-intentioned management teams would neglect governance. They simply would not must face the burden of reporting publicly about it every three months.
Quantitative and systematic strategies that depend on a continuous flow of reported fundamental data to recalibrate factor risk, predict risks and validate machine learning inputs would face clear challenges. However, many are likely already working on scenarios and adjusting their factor construction and risk monitoring practices in anticipation of such a shift.
Perhaps the largest winner from expanding earnings reporting can be the lively fund management industry. Less frequent public information means more room for alpha generation: more room for expertise that could make a difference, whether that expertise is available in the shape of a human, a pc, or increasingly a combination of the 2. This is an environment where fundamental analysts and PMs must adapt their research cycles and model inputs to an extended timeframe while prioritizing proprietary research.
Quantitative and systematic strategies that depend on a continuous flow of reported fundamental data to recalibrate factor risk, predict risks and validate machine learning inputs would face clear challenges. However, many are likely already working on scenarios and adjusting their factor construction and risk monitoring practices in anticipation of such a shift.
Alternative data providers would likely see an acceleration in demand as corporations convert the time and resources currently spent processing earnings into data that may illuminate the gaps created by less frequent disclosure. In contrast, providers whose products depend on regular submissions to evaluate governance, compensation alignment and ESG progress would face clear challenges.
It is less clear whether the sell-side can be a net winner or a net loser. Much of the stock research, sales and business brokerage activity occurs around earnings season, and without this event trading catalysts would fade. Halving the frequency of formal deliverables would mean fewer opportunities to post notes, host calls and capture customers’ attention.
The financial media would also lose a vital driver of readership and engagement. A slower cadence would shift narrative power from reported data to speculation, potentially reducing accountability for each journalists and analysts.
Could fewer public earnings releases help preserve the role of equity analysts? The threat of AI to young analysts stays, however the expertise of the experienced sell-side community could change into more helpful. Knowing what inquiries to ask and what data to research between formal earnings releases is the staple of a talented analyst, and a slower pace could increase the importance of those skills.
Similarly, less frequent and standardized disclosures would pose challenges to the passive investing ecosystem, which relies on regular, standardized reporting to keep up index accuracy and benchmark integrity. Allocators and institutional managers using these products can be at greater risk of index composition and weighting becoming stale, particularly in volatile markets, increasing the likelihood of tracking error.
Ultimately, the talk over quarterly versus semi-annual reporting will not be nearly disclosure cadence, but in addition feedback loops, incentives, and behavior. Slowing down this rhythm can lead to trading some transparency for depth of thought. The clear insight for practitioners is: Regardless of reporting frequency, success is determined by disciplined investment decision-making, effective process monitoring, and the flexibility to leverage alternative data and feedback sources to fill information gaps.
[1] McKinsey & Company and FCLTGlobal, Corporate Long-Term Behaviors: How CEOs and Boards Drive Sustained Value Creation (October 2020), p. 36.
