Quarterly vs. Semiannual Reporting: What’s at Stake for Investors and Lenders

In an effort to encourage more corporations to consider an Initial Public Offering (IPO), the U.S. Securities and Exchange Commission (SEC), is considering changing a longstanding system by making quarterly earnings reporting discretionary. The SEC regulates public corporations and enforces financial disclosure rules to provide timely, accurate financial information to help investors make informed investment decisions.


Currently, publicly traded corporations report their financial performance every quarter. The SEC is considering a new requirement that would allow these corporations to only report their financial performance semiannually. Eliminating mandatory quarterly reporting represents a significant deviation from the 50-year standard.


Some support the proposed change because they believe it would reduce compliance costs and incentivize more corporations to become publicly traded. However, others oppose the proposed change because investors that depend upon timely and consistent financial disclosures may have to wait for the necessary financial data to facilitate efficient capital allocation.


Timeliness Is a Core Principle


To provide financial information that is current and relevant, timeliness is essential. Timeliness is a defined qualitative characteristic of useful financial information, according to the Financial Accounting Standards Board Conceptual Framework. The usefulness of financial information is diminished with each delay between reporting periods.


Publicly traded corporations exist in an environment where investors, lenders and other stakeholders base their decisions on the financial data that is currently available. Therefore, if the reporting periods for publicly traded corporations are reduced to semiannual reporting, there is a higher risk of outdated data and therefore, poor decisions.


Well run corporations typically generate accurate internal financial statements on a monthly basis. It is unreasonable to assume that quarterly reporting will be too burdensome. It is simply an expectation of those that participate in the public markets.


Capital Allocation Depends Upon Current Data


Effective capital allocation requires access to both timely and accurate data. Investors use the most recent reports to evaluate the performance and risks associated with the corporation. Lenders utilize the most recent financial data to determine credit worthiness and structure lending accordingly. The proposed infrequent reporting would limit investors’ ability to make informed decisions using stale data.


Infrequent reporting would limit the visibility of a corporation’s financial position and ultimately, affect the allocation of capital across markets.


Increased Risk of Information Asymmetry


Additionally, reduced reporting frequency creates increased risk of information asymmetry. Where corporate management operates with real-time financial data, external stakeholders are provided with less frequent updates, thereby creating an unequal distribution of information.


With this growing gap:


  • Investors may lose confidence in reported valuations.
  • Risk assessment becomes more difficult.
  • Market participants may begin to rely more on assumptions than data.


The lack of transparency created by this dynamic negatively impacts the overall transparency of the market.


Impact on Market Stability


Reporting frequency can have implications for market behavior. When a corporation reports its earnings at irregular intervals, it may compel other investors to attempt estimating what the earnings actually were.


These estimates -- or rather, speculations -- create investor reliance on a lot of guesswork and less on actual data. This leads to stock price movements that are less about the fundamental characteristics of the corporation and more about investor expectations.


Furthermore, when the financial statements are finally issued, the price adjustment is likely to be larger.


Costs Associated with Compliance


Proponents of reducing reporting frequency do so based on lower compliance costs.


However, reducing the reporting frequency is not the only method to address increasing compliance costs. A more focused approach would be to examine the scope of disclosures within financial reports.


By streamlining reporting requirements and focusing on material information, the complexity and cost of reporting can be reduced while maintaining the benefits of timely reporting. Reduced reporting frequency provides for improved operational efficiency, while maintaining transparency.


Standard Premium and Reporting Frequency


At Standard Premium, timely access to financial information is a key element in assessing risk, determining appropriate financing and managing risk.

As a provider of insurance premium financing, our ability to assess financial stability, structure lending appropriately and manage risk is dependent upon having access to consistent and reliable financial data.


Should reporting frequency be reduced, there would likely be less current external financial information across the market. In such an environment, lenders would likely rely more heavily on internal analysis and alternative data sources to maintain the same level of discipline in underwriting.


For corporations, this emphasizes the importance of maintaining good financial visibility and planning, especially since operating costs, including insurance premiums, are subject to fluctuations.


Future Outlook


The SEC proposal is currently being considered and has not yet been formally adopted. Once approved, it will go through a formal public comment period prior to any final decision. The proposal has raised a broader question regarding the balance between reducing regulatory burden and maintaining market transparency.


For nearly 50 years, quarterly reporting has provided a consistent framework for providing timely financial information. Any potential changes to this framework should carefully weigh the roles of transparency and timeliness in providing for efficient and stable markets.


Access to current, reliable financial data is a critical component of informed decision-making for market participants.


Contact Standard Premium today to learn how we can help you maintain flexibility, manage risk and make more informed financial decisions.


Contact Brian Krogol


Phone: (800) 592-7753 ext. 220

Email: bkrogol@standardpremium.com

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