Fructivore Investments

A brewing crisis is befalling the American financial landscape in the form of a proposed SEC rule that will allow publicly traded companies to switch from quarterly to semiannual reporting. This is exactly as bad as it sounds. And I say this not as a reflexive neophobe, but because of the risk that it will weaken the flow of information to the investment world without having the proposed beneficial effect on the quality of management.

Information, timely and accurate information, is the lifeblood of all investors, and the way to get it is not to rely on what they want to tell you, but what they have to tell you. It is true of the discovery process in litigation and equally true in the investing arena.

It is true that quarterly earnings reports are not to be found in the Constitution or the Bill of Rights. The SEC used to allow semiannual reporting until 1970. However, since 1970 the S & P 500 has returned a cumulative 33,300%. I suppose not all of that increase can be attributed solely to quarterly reporting, but surely some of it can.

You see, the more information investors have, the more confident they are in the reliability of their estimates of future cash flows and other financial figures, and as such they will demand a lower theoretical return on investment. Removing information from them will have the opposite effect.

To put this effect into numbers, it is estimated that even a 1% increase in required return on equity could cost 10-15% of the US market cap, or a total of 7-10 trillion dollars. Since the Commission claims that this switch could save firms only $200,000 a year in compliance costs, or $1.1 billion a year when spread across the roughly 5500 publicly traded companies in America, I find a severe imbalance in the cost-benefit analysis.

The proponents of this rule seem to rely on two arguments, first that companies could be permitted to take a longer term approach without having to manage quarterly earnings, and second based on compliance costs.

On the first point, long term thinking from corporations has a horizon of several years, not six months. And no one would seriously propose changing the financial reporting period from quarterly to quadrennially just to incentivize long term thinking. Also, I would suggest that rational businesses will have projects from three years ago coming into fruition now, and projects now that will come to fruition in three years, so the quarterly returns will have a rolling boost. Present research already links short-termism to lowered return on invested capital, so it is only the irrational businesses that succumb to short-termism in the first place, and this change will give them an additional three months to conceal their irrationality.

As for compliance costs, I cannot deny that they are substantial particularly for smaller firms. But, although I am generally an AI skeptic, I can still see a regime where financial reports can be prepared on arbitrarily short periods, at least without the management discussion and analysis section (which, to be fair, is sometimes useful, but the AI could probably send out a questionnaire to management or just work out its own estimates of the reason for changing figures and the CFO could just proofread it for reliability). More to the point, the large and more economically significant firms benefit from economies of scale in their financial reportage and the burden on them is relatively much smaller on a percentage basis, so they definitely aren’t the ones crying out for relief.

My other concern is that this rule change is a gift for private equity firms, both by the potential one-time price drop caused by the adoption of this new rule, but the owner of a private firm, being an insider, doesn’t have to wait until the quarterly reports are out; a report covering any period, short or long, current or historical, can be produced on demand at any time. Delaying information available to public market participants only further cements this competitive advantage. I have nothing against private equity, but robust public markets are what made this country great and what allows investment analysts have fun and show off rather than allow investment opportunities to be monopolized.

So, what can be done? Well, at the moment the comment period is still open, so any of my loyal readers who share my concerns should submit a comment opposing this rule at

https://www.sec.gov/comments/s7-2026-15/semiannual-reporting#no-back

I am told the SEC is at least required to read them, and although historically speaking commenting does have a good track record in terms of repealing the rule entirely, it can result in delays, modifications, and so forth Perhaps the proposed rule could be confined, as I suggested in my own submitted comment, to small firms that find their regulatory reporting burden to be an actual burden.

The comment period expires on July 6, so by all means hurry up.

Filed under:
economics, Investing by grocca