Investing

Why quarterly financial reports matter

Communication is key to all relationships, including between company and investor.

During the past few months, almost no one I have talked to supports the obligation of spouses to talk to each other more than once a day. The slow process of unwinding this obligation has already begun.

This is the tip of an information iceberg. The common reaction to every marital failure is to say people should talk more. Viewed in the abstract, who could be against more transparency? You can never have too much information in a relationship.

But you can. What if you bowled a few games on the way to pick up petunias at Home Depot? Or have an ongoing extramarital relationship? Do you really want to have all those conversations about bath mats and school merits? Why shouldn’t we block too much relationship chatter? It would give us more time for deep thoughts about the relationship.

Okay, this likely strikes you as silly. And it should. Nevertheless, a similar line of thinking is commonplace among critics of frequent financial reporting. In an effort to ease the regulatory burden on companies, the EU is considering scrapping the requirement for quarterly financial reports. British economist John Kay, who recently led a U.K. review of the issue, found widespread opposition to “the tyranny of quarterly earnings.” Writing in the Financial Times, he noted that it’s a costly distraction for executives, while investors find the information “useless or misleading.” What’s more, managers misbehave when they’re forced to disclose information frequently. They will play games with cash flows, favour short term payoffs over long-term ones, and generally optimize for now versus later.

Parcelling out data less often fixes that problem, Kay and others argue. By preventing investors from getting overly attuned to the short-term burps, burbles and wobbles of a business, companies will be better able to do what needs to be done in the long term. It is a fine story: managers would think more Big And Important Thoughts about Big And Important Projects, if only nuisance investors would let them. The trouble is that there is little evidence this argument holds.

First, “managerial myopia,” as the academics call it, and its relationship to disclosure frequency has been studied for decades. Most studies show that the relationship is complex, with increased frequency sometimes causing managers to focus on the short term and sometimes on the long term, and sometimes it has no effect at all.

Second, it’s not obvious that given less-frequent reporting requirements, management’s glorious long-term projects would be favoured by investors. Through the annals of corporate history roam many white elephants— misguided and costly dreams that would have been better killed sooner than later. Some managerial near-sightedness is real, but the best way to induce far-sightedness is not to leave companies alone. It is better, as in any relationship, to talk more often, not less.

Paul Kedrosky is an investor, entrepreneur and creator of the blog Infectious Greed.