Quarterly reporting: the debate rages on

WITH a formal review of quarterly reporting in Singapore looming on the horizon, much of the investing community's attention of late has been focused on arguments for and against keeping this practice mandatory.

Just recently, this publication ("Quarterly reports: why not let shareholders decide?" BT, Sept 5) posited that the decision ought to be left to a company's shareholders, who would vote on whether the company should continue with quarterly reporting at its annual general meeting (AGM). The writer argued that this would place the onus on management to offer convincing reasons to shareholders as to why quarterly reporting is not necessary for their companies and also force greater shareholder participation.

In response, veteran investor Ang Hao Yao said ("Keep quarterly reporting; better still, give even more updates via social media"; BT, Sept 7) that he agreed that the suggestion was workable, though he suggested that a re-vote be taken on the matter every two or three years; and that any shareholder with access to insider information, for example, the company's major shareholders, board members and executives, should be required to abstain from the vote. He added, however, that while he felt some tweaks to the current system are timely, Singapore should still maintain mandatory quarterly reporting, "as it is still critical to investors for making sound investment decisions".

CAREFUL STUDY

"I believe market participants and shareholders of companies have benefited greatly from receiving regular reports and have come to depend on it," he added.

Such benefits will likely form the focus of any formal review by the regime on whether Singapore ought to keep quarterly reporting mandatory going forward; these will likely be weighed against oft-cited complaints by companies that the practice adds a substantial compliance cost to their expenses.

Singapore Exchange Regulation (SGX RegCo) chairman Tan Cheng Han said in a public address in August that "developments since (mandatory quarterly reporting was introduced in 2003) should prompt us to re-evaluate its usefulness today". "I am not saying that it should be removed but, given widespread views that it adds little value today and gives rise to significant compliance cost, we ought to study the matter carefully," Prof Tan added.

Corporate governance advocates Mak Yuen Teen and Chew Yi Hong argued in a recent piece ("Scrapping quarterly reporting a bad move", BT, Aug 16) that such "widespread views" likely comes mainly from issuers and directors, who have access to regular management reports, often on a monthly basis, and are not the target users of quarterly reporting information.

"If there are concerns about whether quarterly reporting in its present form adds value, regulators should also consider how to improve it, and not just consider dropping it. For example, they could consider improving the information required to be disclosed or encouraging or requiring quarterly reports to be reviewed by auditors. Of course, this may increase costs. However, if the (Singapore) Exchange and SGX RegCo do not consider these alternatives carefully, it would suggest that reducing requirements to attract more listings or prevent more delistings is what is driving the review of quarterly reporting."

They added that this year's Noble Group debacle was a prime example of how investors would have suffered - through the lack of timely information - if quarterly reporting had been scrapped.

And they are not alone in their views on the benefits of quarterly reporting to investors. A recent study, Financial reporting frequency and earnings information spillovers around the world, states: "The evidence suggests that reduced reporting frequency impairs the ability of investors to properly value firms and impedes the efficiency of financial markets." The joint study, conducted by Salman Arif of the Kelley School of Business at Indiana University and Emmanuel T De George of London Business School, examined whether companies' reduced reporting frequency affects how investors use alternative sources of information.

INFORMATION SPILLOVERS

"We show that not only does low reporting frequency affect asset prices by exacerbating information spillovers, but it can also have unintended consequences in the form of impairing the ability of investors to properly value firms and impeding the efficiency of financial markets. Regulators and policymakers around the world should take into account these consequences when considering changing the frequency of mandatory financial reports," the authors said.

A 2016 doctoral study at Yale University showed that quarterly reporting reduced information asymmetry by reducing the time over which the information advantage of informed traders is able to grow and accumulate. Empirical tests using data from the US, Europe, Singapore and Japan supported the impact of quarterly reporting on reducing information asymmetry. And a 2012 US study found that an increase in reporting frequency reduced information asymmetry and the cost of equity capital.

As for arguments stating that quarterly reporting is a costly practice for companies, one of the most notable came from founder of massage chair and lifestyle products company, OSIM. Ron Sim delisted his company from SGX last year, and is attempting to re-list it in Hong Kong as the V3 Group. Mr Sim has made known his dissatisfaction with the regulatory requirements of listing in Singapore, saying - among other things - that "quarterly reporting destroys company value".

One could retort, however, that the valuations Mr Sim's company achieved here versus the perceived valuations he believes it will attract in Hong Kong also played a big part in his decision to re-list in Hong Kong, observers say.

POSSIBLE TWEAKS

Still, to address some of the complaints surrounding compliance cost, Mr Ang has proposed possible tweaks to the quarterly reporting regime, such as by increasing the threshold for companies - that need to file quarterly reporting - from S$75 million to, say, S$100 million. A simplified format could also be introduced to ease the burden of reporting. He stressed, however, that quarterly reporting must remain a mainstay of Singapore's market.

And Prof Mak has argued that, should Singapore choose to do away with quarterly reporting, it should be prepared to increase its surveillance and enforcement of continuous disclosure by companies in response.

"By reducing the information available to investors, there will be a reasonable expectation on the part of investors of enhanced monitoring and enforcement of the continuous disclosure requirement and insider trading provisions by SGX RegCo and other regulators. There may also be a need to review whether the current blackout periods for trading are adequate and whether stricter controls on trading by insiders should be imposed.

"From an investment standpoint, dropping quarterly reporting may (even) reduce trading and aggravate the lack of liquidity in our market," he has said.

Should Singapore decide to drop mandatory quarterly reporting, it would be the first jurisdiction in the region to do so, putting the regime out of sync with the rest of the region's capital markets.

According to Asian companies' financial reporting frequency, a report authored by Francis Adrian Viernes and posted on the CFA Institute's Asia-Pacific Research Exchange (ARX) member portal in March last year, most companies in the Asia-Pacific release quarterly reports, with a complete set of financial statements. The report reflected that, while jurisdictions in Europe may have been resisting the adoption of quarterly reporting, it is widely practised and accepted in this part of the world.