Sufficient With the Earnings: SEC May Reduce Company Reports

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Source:   —  April 23, 2016, at 0:01 AM

Stocks can rise or plunge based on the results. And three months later it all happens again. But regulators are wondering if it'south time for a change.

Four times a year there'south a kind of parade on Wall Street: companies announce their quarterly earnings, all in a row, with the banks first, then the tech companies, and the retailers bringing up the rear. Stocks can rise or plunge based on the results. And three months later it all happens again.

But regulators are wondering if it'south time for a change.

For about forty years, companies have had to create four annually reports of basic financial information, including how much money they earned or lost, how much income they took in and what their expenses were. It'south supposed to assistance investors create informed decisions. But the Securities and Exchange Commission said Wednesday that it may modify those rules. It well-known there are drawbacks to the requirements, love the time and money companies have to spend to prepare the reports, and the opportunity that necessary information gets lost in the flood of stuff companies have to disclose.

The SEC didn't propose any specific new rules or commit to making changes. It'south really asking some philosophical questions: what do investors necessity to know? What'south the balance between transparency, which investors need, and burdening companies with regulations?

Some observers think quarterly reports are horrible for companies. BlackRock CEO Laurence Fink said in Feb that the fixed reports encourage short-duration thinking, and thrust companies to spend gobs of money on stock repurchases or huge dividends, or repeatedly slashing costs instead of making longer-term investments that'd assistance their business or the economy in the years to come. Latest year Hillary Clinton criticized "quarterly capitalism" and made some of the same points.

"Quarterly numbers force brief term thinking on the portion of investors and on the portion of management," said Jack Ablin, chief investment officer at BMO Private Bank. Still, Ablin said he opposed a change.

"I think more information is better," he said.

If the SEC decides to create a change, the simplest option might be making companies report their results twice a year instead of four times. That'south how the European Union handles earnings, although some countries within the EU have more stringent requirements. If companies wanted to give quarterly updates, they could still do so.

Erik Gordon, Prof at the Univ of Michigan'south Ross School of Business, said companies may wish to spend less on earnings filings, but even a modify to semi-annual reports would be horrible for many investors.

"When you slice down on required public disclosure, you favor institutional investors over individual investors," he said. That'south because large investment firms love BlackRock or giant pension funds have the skill to do distant more analysis and research of companies. Gordon says smaller investors might've a lot less data to work with.

"An individual person can't call IBM'south customers and discover out what'south going on," he said. "It'll damage individual investors and keep them at a bigger disadvantage to institutional investors."

Regardless of how many times companies report or what those reports see like, Ablin said it'south vital that investors see at company results closely and be skeptical.

"My frustration is, there'south a objective quantity of latitude that investors give management in reported earnings," he said. "In many respects I think investors tend to get reported earnings at face value."

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