For decades, voices from both left and right have complained that American corporations are too focused on quarterly earnings. Critics argue that quarterly reporting creates an obsession with short-term earnings management at the expense of long-term vision. Last week, SEC Chair Paul Atkins said he wanted to let companies opt out of quarterly reporting.
Perhaps Atkins is correct, and we should reduce burdensome corporate disclosure requirements. But I want to address the widespread belief that quarterly reporting creates crippling corporate myopia. This idea is nonsense. For more than a century, most U.S. corporations have reported quarterly earnings. During this period, the U.S. managed to win two world wars, put a man on the moon, and become the world’s financial superpower, all despite the supposedly horrific burden of quarterly reporting. If quarterly reporting causes short-term thinking, why is the U.S. such a long-term success?
Accurate and timely information is the lifeblood of financial markets. America has the world’s most valuable stock market thanks partly to the longstanding American tradition of quarterly earnings reporting. Part of “American exceptionalism” is America’s exceptionally strong embrace of quarterly reporting.
If you think something has gone wrong in corporate America, or that “the market is broken,” that’s your prerogative. But whatever has gone wrong, it can’t be quarterly reporting, because America has been doing it since the 1880s.
A brief history of quarterly earnings
With the rise of the modern corporation in the nineteenth century came the advent of periodic reporting of profits and other accounting information. In Britain in the 1830s, railways reported semi-annual financial statements. By the 1860s, U.S. railways were reporting monthly, and sometimes weekly, gross earnings. Eventually, corporations adopted quarterly reporting. For example, The Wall Street Journal discussed the quarterly revenue of Western Union on December 11, 1889.[1]
Here's another example, from the New York Times of January 8, 1902:
The stock market yesterday was distinctly heavy throughout the day as the result of pressure brought to bear upon it by a number of the leading professional operators who were loud in their predictions that the earnings of the United States Steel Corporation for the quarter ended Dec. 31 would be decidedly disappointing, and much below general expectations.
Today, about five hundred quarters later, U.S. Steel is still reporting quarterly earnings.
U.S. Steel reported quarterly earnings in 1902 not because of regulations (the SEC did not exist until 1934), but in order to communicate information to its shareholders. Quarterly earnings disclosure is a bottom-up historical phenomenon reflecting voluntary arrangements between firms and investors, not a top-down phenomenon imposed by law. As discussed in Frazzini and Lamont (2007):
- By 1931, 63% of NYSE firms voluntarily reported quarterly earnings.
- By 1939, the NYSE required most firms to report quarterly earnings.
- The SEC imposed semiannual reporting requirements in 1955 and quarterly requirements in 1970.
Quarterly earnings continue to be major events in the stock market. Indeed, according to Beaver, McNichols, and Wang (2017), their importance increased between 1970 and 2011. And as shown by the recent hoopla surrounding Nvidia’s earnings, quarterly reporting remains a big deal.
Are U.S. corporations too short-term?
As discussed in Kaplan (2018), critics have been bemoaning corporate myopia since the 1970s. In my view, these concerns are overstated. I agree with Roe (2013) that
… the evidence that the stock market is, net, short-termist is inconclusive. There is indeed much evidence supporting the conclusion that it overvalues quarterly earnings. But there is also much contrasting evidence that stock market sectors often overvalue the long term, most obviously in the intermittent bubbles in technology and other new industries.
The stock market often seems to overvalue pie-in-the-sky future projections and neglect tangible short-term information. For example, in 2021 we saw many unprofitable firms with zero revenue and negative earnings receiving high valuations. Corporate myopia (near-sightedness) seems like a smaller problem than corporate hyperopia (far-sightedness).
Should quarterly disclosure be mandatory?
What would happen if we made quarterly disclosure optional, as suggested by Atkins? Probably not much. Since most U.S. firms were already reporting quarterly before the SEC mandated it in 1970, most will probably continue even in the absence of mandates. Corporations generally take actions that investors want, and as long as investors want quarterly reporting, most corporations will do it.
Consider the U.K. experience. In 2007, the British authorities mandated quarterly disclosure, moving closer to the U.S. model. Then in 2014, they changed their minds and eliminated the mandate. According to Nallareddy, Pozen, and Rajgopal (2017), only 9% of firms stopped reporting quarterly when given a chance.
There’s some evidence supporting the idea that quarterly mandates do indeed cause corporate myopia. Further, the hassle and cost of quarterly reporting might well outweigh the benefits for small firms. Here’s a summary from Roychowdhury, Shroff, and Verdi (2019):
On the one hand, Fu et al. (2012) document that an increase in reporting frequency can be beneficial for a firm because it reduces the firm’s cost of capital. On the other hand, Kraft et al. (2018) find that increases in reporting frequency can be detrimental to shareholders of the firm because it leads managers to reduce investment by exacerbating myopic incentives. Further, Kajüter et al. (2018) find that increases in reporting frequency is net costly for small firms (due to compliance costs) …
So I’m willing to concede that myopia, while not a huge problem, might be exacerbated by quarterly disclosure and that, perhaps, we could make the U.S. stock market marginally better by dropping the mandate. But my main reaction is: if it ain’t broke, don’t fix it.
It might well be true that burdensome regulation is discouraging companies from going public. In the wake of the Sarbanes-Oxley Act of 2002, the number of publicly listed U.S. firms went down. But if Sarbanes-Oxley is the problem, you shouldn’t blame quarterly reporting, you should blame Sarbanes-Oxley. If quarterly reporting was feasible using the technology of 1902, it’s hard to see how it can be intolerably onerous in 2025.
Building a prosperous America, quarter by quarter
The twentieth century witnessed a series of American triumphs. And hovering over every triumph, like an unseen angel, was the benevolent presence of quarterly reporting.
When the Wright brothers flew history’s first airplane on December 17, 1903, they announced their success using a Western Union telegram. Western Union’s latest quarterly results had previously been reported on December 12, 1903.
When U.S. troops stormed the beaches of Normandy on June 6, 1944, they brought amphibious vehicles manufactured by General Motors, which had previously reported quarterly earnings on April 29, 1944. America, land of quarterly reporting, eventually defeated Germany, land of semi-annual reporting.
When the Apollo astronauts landed on the moon on July 20, 1969, they used a lunar lander made by the Grumman Aircraft Engineering Corporation, which had previously reported quarterly earnings on May 7, 1969.
America’s military, technological, and economic success was achieved partly by corporations that reported earnings every quarter, like clockwork. Quarterly reporting is as American as apple pie. I’m not saying that it’s the only reason that America became the world’s dominant financial superpower. But it sure didn’t hurt.
Endnotes
[1] References to this and other companies should not be interpreted as recommendations to buy or sell specific securities. Acadian and/or the author of this post may hold positions in one or more securities associated with these companies.
References
Beaver, William H., Maureen F. McNichols, and Zach Z. Wang. "The information content of earnings announcements: new insights from intertemporal and cross-sectional behavior." Review of Accounting Studies 23, no. 1 (2018): 95-135.
Frazzini, Andrea, and Owen A. Lamont. "The earnings announcement premium and trading volume." 2007.
Kaplan, Steven N. "Are US companies too short‐term oriented? Some thoughts."Journal of Applied Corporate Finance 30, no. 4 (2018): 8-18.
Nallareddy, Suresh, Robert Pozen, and Shivaram Rajgopal. "Consequences of mandatory quarterly reporting: The UK experience." Columbia Business School Research Paper 17-33 (2017).
Roychowdhury, Sugata, Nemit Shroff, and Rodrigo S. Verdi. "The effects of financial reporting and disclosure on corporate investment: A review." Journal of Accounting and Economics 68, no. 2-3 (2019): 101246.
