How Trump's corporate disclosure proposal could change investing

How Trump's corporate disclosure proposal could change investing

President TrumpDonald John TrumpTrump: I hope voters pay attention to Dem tactics amid Kavanaugh fight South Korea leader: North Korea agrees to take steps toward denuclearization Graham calls handling of Kavanaugh allegations 'a drive-by shooting' MORE’s recent call for fewer corporate disclosures extended unprecedented White House backing for an issue that’s had the support of some of the nation’s top CEOs for years.

Trump on Friday endorsed the idea of allowing public companies to issue reports to shareholders twice a year instead of the quarterly cycle mandated under federal law.

He said fewer reports would "allow greater flexibility & save money" for U.S. businesses, and he asked the Securities and Exchange Commission (SEC) to study the potential impact of loosening existing rules.

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Business leaders have long called for reducing the frequency of revenue forecasts, which are often included in quarterly earnings reports, in order to tamp down on short-term market speculation.

While Trump’s request is unlikely to get expedited consideration at the SEC, given the independent agency’s lengthy regulatory agenda, analysts and lawmakers say the potential benefits and risks deserve serious scrutiny in the event that action is taken in the near term.

Benefits

Less volatile stocks

Advocates for reducing the number of corporate disclosure say it would move investors away from what’s known as quarterly capitalism — bets made with a focus on short-term market fluctuations instead of long-term fundamentals.

A company’s stock prices can rise or fall sharply after its quarterly earnings are published, as investors measure the figures against their expectations for the firm. An earnings miss could sink the stock, while a good quarter could trigger a spike in value.

“Many stocks react wildly to earnings reports, and this causes noticeable gaps on their daily charts,” said Frank Cappelleri, executive director of equity sales and trading at Instinet Inc. “The fewer the amount of earnings announcements, the fewer the gaps and the longer a trend can remain intact.”

 

More focus on long-term investments

Supporters of fewer disclosures say fewer earnings reports would give executives more room to pursue long-term growth without spooking investors. They argue that doing so would help guard against what's known as short-termism because executives would be more open to investments in the firm’s future if those initial costs don’t run the risk of sinking the stock value through an earnings miss.

In June, the Business Roundtable, a CEO trade group chaired by JPMorgan Chase chief Jamie Dimon, called for corporations to stop issuing quarterly earnings forecasts so firms could focus on longer-term growth. While federal laws require publicly traded companies to report on their performance from the previous quarter, earnings projections are not mandated.

Berkshire Hathaway CEO Warren Buffett, a fellow Business Roundtable member, said in June that "when companies get where they're sort of living by so-called making the numbers, they do a lot of things that really are counter to the long-term interests of the business.”

 

Lower compliance costs for smaller firms

While large corporations have little trouble affording the costs of quarterly SEC reports, smaller firms could save valuable time and money if fewer reports are required, according to supporters of reduced disclosures.

A bipartisan bill that passed the House in July contained a provision that would mandate a study similar to the one requested by Trump. House Financial Services Committee Chairman Jeb HensarlingThomas (Jeb) Jeb HensarlingKavanaugh hires attorney amid sexual assault allegations: report Did Congress just settle for less than best plan to reform housing finance? The White House can — and should — bypass Congress to kill Obama-era spending MORE (Texas), the GOP lead co-sponsor of the measure, praised Trump’s effort to “evaluate the impact and cost of federal regulation on American businesses and entrepreneurs.”

“We must modernize our capital markets regulations in a way that maximizes economic growth while maintaining the transparency and accountability needed to protect investors” Hensarling said in a statement.

 

Risks

Less information from influential companies

A company’s quarterly report reveals not only its financial health, but also whether it’s facing major litigation or investigations by federal or state regulators. Critics of less frequent disclosures say fewer reports would limit the amount of crucial information available to the investing public.

"Many investor advocates will push back aggressively on the idea because they believe less-frequent reports will result in less information for investors,” wrote Capital Alpha Partners analyst Ian Katz in a Sunday research note. “Supporters of twice-yearly reporting will have to make assurances that companies will release more information to investors between reports."

 

More market speculation

Cutting back on earnings reports is intended to shift Wall Street’s short-term focus, but each disclosure could carry greater weight and drastically skew markets.

“If companies only reported earnings data twice a year, a lot more attention and weight would be on their releases,” Cappelleri said. “The trading surrounding those dates then would be even more volatile."

Critics of Trump’s request say regulating compensation plans for corporate executives would do more to counter quarterly capitalism than holding back information from the public.

“Claiming to address short-termism by reducing publicly disclosed information is treating a symptom rather than the disease itself,” said Dennis Kelleher, president and CEO of Better Markets, a group that supports tougher financial laws. “If President Trump, the SEC or anyone else wants to genuinely know how and why short-termism is distorting and undermining long-term performance and growth, they need to focus on the incentives that drive the short-term focus.”