Hey, Let's Drive More Market Volatility!!

Reviving a short-lived suggestion he made in his first term, President Trump suggested today that he favors eliminating the quarterly reporting requirements placed on public companies, moving to a six-month model. Already the media are trotting out the usual arguments, especially the aspirational one suggesting that reducing this burden will enable companies to focus more on long-term planning.

Let’s look at the practicalities.

Going to six-month reporting dramatically changes the playing field, but not the game. Stocks are priced based on the market’s crowdsourced view of a company’s future performance potential. That potential is gleaned from prior performance, expected market and business conditions, and what the companies themselves say about the future (and to what extent investors believe what they say). These factors will not change. What will change is the lengths to which investors go to procure the information that informs their decisions, and companies’ willingness to share that information versus leaving investors to their own whims and other sources.

Here’s where this gets interesting. Companies are protective of material information, for both regulatory and business reasons, but they know that the value of their stock is dependent on a well-informed marketplace. Reducing disclosure burdens creates a new challenge for them: how to deliver nuanced information to the market outside of a highly controllable environment like a quarterly earnings call. Add to this likely higher share price volatility if companies have less to say when markets are nervous about things like tariffs, wars or recessions. Also, while there is some wisdom in disincentivizing quarterly earnings guidance for certain types of companies, there are already proven guidance constructs that moot that point. Quarterly reporting requirements do not come with a guidance requirement.

Bottom line, markets and companies will have to adapt to new ways of communicating in between six-month reporting intervals, with the added headache of more legal and advisor counseling on new kinds of materiality judgments.

Meantime, don’t forget that inside companies, quarterly reporting requirements are an important forcing function and lever for management in driving employee performance. Any sales lead inside a public company knows this much better than I do.

So, it’s easy to imagine a world where fewer reporting cycles cause execs more agita than the quarterly call, if they want a well-informed market and a less volatile and appropriately valued stock. Don’t forget, those of you who cite the virtues of long-range planning resulting from reduced reporting burdens, the value of a company’s equity is likely critical to executing on those plans.

Oh, and for those lamenting quarterly reporting burdens and costs as playing a big role in keeping companies private longer, that’s a symptom not a cause. Companies go public when the value of having a public equity currency is too big to ignore relative to how cheaply they can acquire capital from private markets. They do it to enhance their brand, their business stature, to cash out early investors and employees, and to gain a cost-effective compensation tool for talent, among other reasons. You’re seeing the predictable IPO cycle return as I type this. The people running these new IPOs surely don’t love preparing for earnings calls, but they also secretly know they’re a valuable platform for getting the attention of not just the markets, but media, customers and other stakeholders.

Of interest perhaps only to grizzled advisors like myself, this idea comes right around the 25th anniversary of the SEC’s promulgation of Regulation FD, which created a seismic shift in how public companies communicate with the capital markets. Before Reg FD, Wall Street played a critical intermediate role in ferreting information from companies and funneling it to professional investors. Especially for smaller, underfollowed companies, the playing field was tilted heavily toward the Street. What many didn’t at the time, and still don’t recognize about Reg FD was that the rule put the narrative back in the company’s control - today companies have a legal framework and obligation to ensure they are communicating fairly and equally with all investors rather than playing favorites. This makes the flow of information more efficient, which is a net benefit to market participants.

In that light, a move toward six-month reporting would be a step backward, forcing companies to make tough decisions on when and how to communicate nuanced business developments, and forcing investors to dig deeper, which can give greater credence to one-off data, trends and rumors in the moment - again driving volatility.

To be sure, I don’t have this take because I see reduced reporting burdens as a threat to my own work; quite the contrary, it will make my job more interesting and challenging. At least for a while, as markets will adapt in time to any regime change. But like lots of ideas that sound good in a social post, be careful what you ask for!

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