Corporate Transparency and Market Stability: The Risks of Abandoning Quarterly Earnings Reporting

The debate over the merits of quarterly earnings reporting has intensified in recent years, as regulators and corporate leaders grapple with the tension between transparency and short-termism. While quarterly disclosures provide investors with timely information, they also incentivize managerial behavior that prioritizes immediate results over long-term value creation. Conversely, shifting to semiannual reporting—proposed by some as a solution to reduce compliance costs and curb short-termism—risks eroding market trust and amplifying volatility. This analysis evaluates the economic and investment risks of moving away from quarterly reporting, drawing on empirical evidence from global markets.

The Dual Edges of Quarterly Reporting

Quarterly earnings reports have long been a cornerstone of financial transparency in the United States. By providing frequent updates on corporate performance, they enable investors to recalibrate expectations and hold executives accountable. Studies of firms in the Dow Jones Industrial Average (DJIA) from 2014 to 2024 reveal that quarterly reporting amplifies market reactions, particularly during high-volatility periods, as investors rapidly adjust to new information How Shifting to Semi-Annual Financial Reporting Affects Market Dynamics and Governance^[2]. This responsiveness, however, comes at a cost: the same frequency that enhances transparency also encourages managers to manipulate accruals and prioritize short-term gains over long-term investments in research, development, and sustainability The Pros and Cons of Quarterly Reporting^[1].

The risks of short-termism are not abstract. Research indicates that firms under quarterly performance pressures often underinvest in critical areas, leading to measurable declines in workplace safety and environmental stewardship The Pros and Cons of Quarterly Reporting^[1]. For instance, companies facing quarterly targets have been shown to increase workplace injuries and environmental violations, as managers cut corners to meet short-term goals The Pros and Cons of Quarterly Reporting^[1]. Such outcomes underscore the broader societal costs of a system that rewards immediate results at the expense of long-term resilience.

The Semiannual Alternative: Cost Savings vs. Market Uncertainty

Proponents of semiannual reporting argue that reducing the frequency of disclosures could alleviate compliance burdens, particularly for small-cap firms. A 2017 regulatory shift on the Tel Aviv Stock Exchange (TASE) allowed small-cap firms to transition from quarterly to semiannual reporting. While this change reduced audit fees by 16% and external audit hours by 19.8% How Shifting to Semi-Annual Financial Reporting Affects Market Dynamics and Governance^[2], it also triggered a 2% average drop in stock prices for adopting firms, reflecting investor concerns over reduced transparency How Shifting to Semi-Annual Financial Reporting Affects Market Dynamics and Governance^[2]. Conversely, firms that retained quarterly reporting saw their stock prices rise by 2.5%, highlighting the market's preference for frequent, reliable data How Shifting to Semi-Annual Financial Reporting Affects Market Dynamics and Governance^[2].

The TASE experience also revealed a decline in corporate governance quality among firms shifting to semiannual reporting. These companies exhibited weaker board diversity, less financial expertise among directors, and a reduced proportion of active directors—factors that correlate with lower governance standards How Shifting to Semi-Annual Financial Reporting Affects Market Dynamics and Governance^[2]. Such governance erosion exacerbates information asymmetry, a key driver of market inefficiencies and volatility The End of Quarterly Reporting in the United States? The SEC and the Long-Term Stock Exchange^[4].

Macroeconomic and Investment Implications

At the macroeconomic level, the transition to semiannual reporting in the UK and EU has yielded mixed results. While less frequent reporting is associated with improved accruals quality and reduced manipulation Quarterly versus Semiannual: Three Essays on Assessing the …^[5], it also increases the cost of debt and equity, as investors demand higher returns to compensate for perceived risks Quarterly versus Semiannual: Three Essays on Assessing the …^[5]. For example, UK firms under semiannual reporting regimes have shown higher capital expenditures and fixed asset investments, suggesting a shift toward long-term strategic planning The Pros and Cons of Quarterly Reporting^[1]. However, this benefit is offset by the potential for fragmented investor perceptions, particularly in markets lacking standardized voluntary disclosures The End of Quarterly Reporting in the United States? The SEC and the Long-Term Stock Exchange^[4].

The EU's reformed fiscal framework, effective in 2025, further complicates the picture. Stricter fiscal discipline for member states with high debt ratios could amplify the macroeconomic risks of reduced transparency, as firms and governments alike face heightened scrutiny over long-term financial sustainability How Shifting to Semi-Annual Financial Reporting Affects Market Dynamics and Governance^[2]. Meanwhile, shifts in financial conditions—such as tighter credit availability—could exacerbate the volatility associated with semiannual reporting, reducing output and inflation by 2.2% and 0.7 percentage points, respectively, over three years Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications^[3].

Balancing the Trade-Offs

The evidence suggests that neither quarterly nor semiannual reporting is a panacea. Quarterly reporting enhances transparency but risks entrenching short-termism, while semiannual reporting reduces compliance costs but may undermine investor confidence. A hybrid approach, as seen in the UK and EU, where firms voluntarily provide quarterly updates alongside semiannual disclosures, offers a potential middle ground The End of Quarterly Reporting in the United States? The SEC and the Long-Term Stock Exchange^[4]. However, without standardized guidelines, such models risk creating inconsistent information flows, further fragmenting market perceptions.

Conclusion

The push to move away from quarterly earnings reporting is driven by legitimate concerns about short-termism and compliance costs. Yet, the evidence from global markets underscores the risks of doing so without safeguards. Semiannual reporting, while promising in reducing managerial myopia, must be paired with robust governance frameworks and voluntary transparency measures to maintain investor trust. As regulators weigh reforms, the challenge lies in balancing the need for cost efficiency with the imperatives of market stability and long-term value creation.