President Proposes Six-Month Financial Reporting Cycle

In the early hours of Monday, a long-standing practice in the United States was once again brought into the spotlight. The President of the United States, through social media, advocated for extending the financial reporting cycle from every three months to every six months. This proposal aims to save costs and allow managers to better run their companies.

This is not the first time the President has spoken on this matter. In 2018, the President supported a semi-annual reporting system, citing discussions with several global business leaders. The President emphasized that this change would increase flexibility and reduce costs.

Historically, the Securities and Exchange Commission (SEC) mandated quarterly financial reports in 1970 as a response to the 1929 stock market crash, aiming to enhance transparency over the following decades.

Currently, opinions on this matter are divided. Some analysts believe that the SEC could easily implement this policy, aligning with its deregulatory stance. However, the rule change would require at least six months of preparation to pass legal scrutiny.

From a strategic perspective, some argue that quarterly reports have become a tool for manipulating expectations. Nearly 80% of companies exceed expectations each quarter, leading to a decline in the credibility of performance guidance. Short-term goals pressure business decisions, and the high cost of reporting exacerbates the "de-equitization" of the U.S. market. Reducing the frequency of reports might be more beneficial for companies.

Others contend that the SEC, while acknowledging the President's authority, faces a true test in whether it will adhere to its original plan if, after evaluation, it deems a change in direction necessary.

Proponents of transparency argue that it is crucial for the efficient functioning of capital markets. Markets reward more open and frequent reporting, and reducing the frequency of information disclosure could be detrimental to investment decisions.

Opponents worry that extending the reporting interval would increase uncertainty and market volatility during disclosure periods. Some believe that lower frequency information is unfavorable for investment, while others point out that it would reduce the points of contact for companies to disclose key facts, weakening investors' ability to understand a company's prospects through conference calls.

Some analysts acknowledge that reducing short-term volatility could benefit certain traders and companies, but it might also lead to increased market uncertainty, lower valuations, and greater volatility during earnings seasons. This could make the S&P 500 index resemble the Russell 2000 index, potentially benefiting active management.

In summary, the debate over the frequency of financial reporting highlights the tension between transparency and flexibility. While some argue that reducing the reporting frequency could save costs and allow for better long-term planning, others worry about the potential increase in market uncertainty and the erosion of investor trust. The SEC will need to carefully consider these arguments as it evaluates the potential changes to the reporting requirements.