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US quarterly earnings requirement up for debate

[NEW YORK] Quarterly earnings season is entrenched in the US business world, offering a window into profits and losses every three months, but critics believe the requirement to lay bare corporate souls four times a year may focus too much on the short-term.

US President Donald Trump, citing input from business leaders, in August asked the US Securities and Exchange Commission to study a possible switch to reporting every six months.

The agency followed up this week, seeking public comment on the current system, with an eye towards reducing "burdens" on companies.

"Our markets thirst for high-quality, timely information," SEC Chairman Jay Clayton said in a news release. "We recognise the importance of this information to well-functioning and fair capital markets.

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"We also recognize the need for companies and investors to plan for the long term. Our rules should reflect these realities."

Under the current system, earnings season lasts roughly one month and kicks off about two weeks after the end of the quarter. Reports are released outside of market hours, giving investors, analysts and journalists a chance to assess profits, sales and spending against expectations.

Companies carefully calibrate and craft messaging about their performance, in press releases and conference calls. An unexpected comment on the company's prospects or the broader economic outlook can send shares skidding.

Even more violent reactions can follow from bigger shocks, as when Symantec plunged 33 per cent in May after announcing an internal investigation and shutting down the conference call without taking question.

Tesla Motors was punished after chief executive Elon Musk in May cut off analysts who asked "boring, bonehead questions" about finances in May. Musk cited excessive reporting requirements earlier this year when he floated the idea of taking the electric car maker private.

While many market watchers applaud the idea of encouraging longer-term thinking, some are not convinced investors are prepared to accept fewer earnings updates.

"Investors will always want more information rather than less," said Frances Donald, head of macroeconomic strategy at Manulife Asset Management.

But Tensie Whelan, director of the NYU Stern Center for Sustainable Business said the desire "to hold the managers accountable, on a quarterly basis has a downside.

The "reality of the quarterly reporting is that it drives bad decision making."

In many cases, executive compensation is tied to beating Wall Street expectations, a dynamic that can lead companies to cut needed investment or undertake programs that look great in the short-term but do not succeed in reality.

"If you look at the scandals, at Wells Fargo, at Volkswagen, underneath they were trying to make their quarterly numbers in unrealistic ways and they were being pressured to do so by analyst expectations," Mr Whelan said.

Stephen Terry, an economist at Boston University, said companies that meet or exceed analyst expectations have done so in part by cutting spending on research and development.

He estimated a 0.1 per cent annual hit to growth in a study titled "The Macro Impact of Short-Termism."

But Mr Terry has not taken a position on quarterly reports, telling AFP in an email that "short-term targets provide useful discipline on executives and transmit important information to capital markets."

Some alternatives to the current system have already been floated.

JPMorgan Chase chief executive Jamie Dimon and billionaire Warren Buffett earlier this year proposed that companies stop providing quarterly earnings forecasts, arguing that the projections can encourage short-term thinking.

Mr Whelan has suggested companies could disclose long-term objectives and targets with their press releases.

One challenge is meeting the demand of different investors, with some shareholders clamoring for more disclosure on environmental and social issues, Mr Whelan said.

At the same time, another group of shareholders, Wall Street activists, are pushing hard for spending cuts, layoffs, share buybacks and other measures to boost share prices.

The SEC will collect comments for 90 days on "the nature, content, and timing of earnings releases and quarterly reports" to study alternatives to the current requirement.

AFP