Consequences of Mandatory Quarterly Reporting: The U.K. Experience
The SEC is considering the pros and cons of moving to less frequent semi-annual reporting from the current regime of quarterly reporting for at least certain types of public companies. Yet, it has been difficult to provide causal evidence on the consequences of mandatory quarterly reporting. Remarkably, a more recent natural experiment mandating a reporting change has occurred in the United Kingdom, which we examine in a recent paper. In 2007, U.K. firms were required to start issuing quarterly “Interim Management Statements” (IMS) (labeled “quarterly reporting,” although the reports need not be strictly issued at the end of a fiscal quarter). However, the Kay Report (2012) recommended and amendments to the EU’s Transparency Directive in 2013 directed the removal of mandatory obligations to provide quarterly reporting. The objective was to reduce pressures that induce short-term decision making by corporate executives. Responding to these two initiatives, the Financial Conduct Authority (FCA) stopped mandatory quarterly reporting in 2014.
It is important to note that the implementation details of quarterly reporting in the U.K., as per the FCA, differ significantly from those of quarterly reporting in the U.S. Unlike the detailed prescriptions governing U.S. 10-Qs, the FCA wanted market-led disclosure practices to evolve around quarterly reporting. Hence, the FCA merely requires U.K. firms to provide an explanation of material events and transactions that took place during the period and to give a general description of their financial position and performance.
After the start of mandatory quarterly reporting in the U.K., the number of firms that issued quantitative quarterly reports, defined as those with sales and earnings numbers, declined. These findings are likely attributable to the FCA’s regulatory philosophy that involves the issuance of minimal prescriptive guidance so as to allow the market to evolve to its own disclosure equilibrium.
After the initiation of mandatory quarterly reporting, the number of firms that issued annual earnings or sales guidance increased significantly. Further investigation reveals that this increase in guidance after the reporting policy change was partly attributable to a relatively new practice in the U.K. market whereby firms started issuing guidance on annual sales or earnings at the beginning of the fiscal year, after which they revise or reconfirm the guidance as part of their quarterly reports.
Most important, we do not find support in the U.K. setting for the claim in the Kay report (2012) and the European Commission (2013) that more frequent financial reporting results in lower company investments. To test this claim, we employ alternative investment measures, including capital expenditures; net plant, property, and equipment; R&D; and intangible assets. If more frequent reporting affects investment decisions, we would expect firms switching to quarterly reporting to be associated with lower capital investments relative to the pre-adoption period and relative to voluntary quarterly reporters. Using a difference-in-difference (D-i-D) analysis, we do not find evidence that firms switching to quarterly reporting experience differential investment patterns.
The initiation of mandatory quarterly reporting, increased analyst coverage for U.K. firms as a whole and is associated with lower analyst forecast error for firms switching to quarterly reporting.
On November 7th, 2014, the FCA published a new policy stating that firms were no longer required to publish quarterly management statements. Subsequently, 9% of the sample firms (45 firms) stopped quarterly reporting. Firms that did not provide guidance when the mandatory rule was in force and firms in the energy industry are more likely to stop quarterly reporting after the rule change. Using a D-i-D analysis, we find that firms that stop quarterly reporting lose analyst coverage. However, the stoppers are not associated with increased levels of corporate investments or with changes in analyst forecast accuracy.
The findings in the paper raise serious doubts about whether a three-month change in the frequency of public company reporting is likely to cause a substantial change in the investment decisions of company executives. In other words, these results suggest that a new SEC rule extending the reporting period from three to six months may not have significant effects on the time horizons of U.S. company executives, absent other major changes such as those proposed by the Kay Report.
Suresh Nallareddy is an Assistant Professor of Accounting at Duke University’s Fuqua School of Business. Robert Pozen is a Senior Lecturer at the MIT Sloan School of Management. Shivaram Rajgopal is the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School.
European Commission., 2013. Revised directive on transparency requirements for listed companies (transparency directive)—Frequently asked questions. Memo (12 June).
Kay, J. 2012. The Kay review of UK equity markets and long term decision making, available here.