Quarterly or Semiannual Reports

SEC Reform

In Chile, as in the U.S., some propose that company reports become semiannual rather than the current quarterly reports. In this piece we think it prudent to present some arguments that the U.S. Securities and Exchange Commission (SEC) has set out in its regulatory proposal.

In principle, the SEC proposes making semiannual reporting an option so that each company can choose according to its commercial needs and investors. The proposal is partly based on how costly interim reports can be to prepare and disclose. Consider, for example, accounting teams, conference calls, or management review. There is also the risk of revealing proprietary information. Taken together, these factors make IPOs less attractive.

But the SEC warns that information is essential for price formation, to protect investors and, more generally, to lower the cost of capital. Thus, it makes explicit the risks of delayed disclosure, reduced comparative analysis across companies, and loss of information.

The U.S. regulator seeks a balance in which each company has greater freedom to decide how to allocate its time in pursuit of maximum value. Except in cases of significant agency problems, there could be an optimum that increases benefits for issuers as well as for investors. It should be noted, in any case, that the content of the reports would not change, nor would confidential information.

Moreover, the proposal considers the possibility that companies choosing semiannual reporting could voluntarily disclose material information quarterly. Therefore, there would be three categories: semiannual reporting with voluntary quarterly reporting (hybrid); semiannual without voluntary quarterly reporting; and quarterly. Voluntary disclosures would not require an audited review.

The SEC also counts as costs the research that investors or associated issuers must carry out on these inputs, which requires them to invest resources.

An important risk identified is an increase in information asymmetry: the longer the interval between reports, the greater the asymmetry, because more sophisticated investors extract and process information by other methods during the gap. Another significant risk is a longer deviation of price from fundamentals, since without information it usually takes longer to reach fundamental value. This can be extrapolated to certain correlated assets, including those with similar risk and return, due to the interdependence of securities.

On the other hand, less frequent information can delay the arrival of capital by obscuring opportunities, causing investors to wait for reports. A similar effect would occur with volatility, since prices would adjust more abruptly if information is reported at longer intervals.

Another possible externality is the mitigation of information gaps through alternative information sources, including the collection and analysis of private information or market discipline. Such mitigation is more likely where alternative data are available, there are significant incentives to collect that private data, and the market efficiently incorporates that information into prices. For example, for large companies investors may have abundant and lucrative opportunities to collect and analyze private information, creating trading opportunities based on the resulting information, which could lead to significant incorporation of information into the prices of those issuers’ securities even in the absence of public disclosure. However, even in these cases, the degree of price discovery may be less complete than with public disclosure and less efficient (because of the costs involved).

An undesirable effect would be a reduced ability to hold management accountable, because less frequent reporting makes it harder to detect when things are not going as investors expect. The same applies to audits: with less information available, it takes longer to uncover anomalies.

Less frequent periodic disclosures can affect management incentives. If reduced disclosure frequency lowers scrutiny of issuers, this could reduce managerial incentives to avoid overemphasizing short-term results at the expense of long-term performance.

Both the beneficial and the undesirable effects are difficult to measure. It should be borne in mind that the externalities may be borne by investors, other issuers, and the economy.

Other arguments in favor

In general, companies use quarterly reports to inform about changes in trading conditions and updates to expectations. Unscheduled announcements between quarters are the exception rather than the rule.

A false market—one that forms prices and discovers them without all material information, and that lasts a couple of weeks—is much less problematic than one that lasts months. The above will likely encourage the use of so‑called continuous disclosure.

At any time, if the gap between market perception and management’s private information about company performance becomes too large, it should be closed with an announcement (a material fact in Chile). In practical terms, this means, for example, that if consensus estimates are off by more than 10 percent in either direction, that would justify some form of communication to the market.

In jurisdictions like the United States, the flow of material information—legally defined by the SEC—is ultimately determined by investors, who can relatively easily sue management in cases of omission or securities fraud (false disclosure).

There is no specific requirement to update the market, given that investors find out anyway within 90 days, but the information must affect value, the offering itself, or the issuer.

Thus, it will be important to correct errors and falsehoods, because past statements that are proven false by the facts expose the company to litigation risk, making it more likely that the record will be corrected. The same applies to formal statements, as they incentivize management to disclose useful information about expectations. Understanding a set of accounts should come from understanding the underlying business, not the other way around. The best argument against quarterly reporting is that it wastes management’s time while inundating investors and analysts with largely useless information, diverting attention to things that do not matter.

Finally, it is important to distinguish continuous disclosure from merely formal disclosure. Proposals to move to semiannual reporting pose an extraordinary challenge for companies. Today, everything is reported as a material fact, much of which is simply formal compliance with continuous disclosure.

But continuous disclosure demands exactly what the SEC proposes: knowing the business well enough to recognize what and when to disclose. It is the company, not the regulator, that knows which information is important for its value, the offering, or the issuer. It becomes necessary to be completely clear about what to report, at the risk of failing and being pursued by investors.

The challenge of reporting less is precisely to report less, not more out of fear of failing. If companies report everything merely to comply with formality, the regulatory change makes no sense. The challenge is to detect what information matters to the company versus what is irrelevant, so as to report only what is necessary and truly leverage the change.