In an age where the velocity of information can significantly impact financial markets, a recent study by Jenna D’Adduzio of The University of British Columbia, David S. Koo of George Mason University, Santhosh Ramalingegowda of the University of Georgia, and Yong Yu of The University of Texas at Austin sheds light on a pivotal aspect of corporate governance and investor relations: the frequency of financial reporting. Their research, published in Accounting Horizons, delves into the effects of more frequent mandatory financial reporting on investors‘ ability to anticipate future earnings, and consequently, on the informativeness of stock prices about future earnings.
The study’s foundation lies in the historical changes in financial reporting frequency in the United States between 1954 and 1972, presenting a unique opportunity to examine how increasing mandatory reporting frequency influences the future earnings response coefficients (FERC). FERC measures the extent to which current stock prices reflect future earnings, serving as a proxy for the price informativeness about future earnings.
Key findings reveal that an increase in reporting frequency is positively associated with firms’ FERC, especially pronounced in firms with higher sales seasonality or those operating in industries with lower earnings persistence. Moreover, the effect is stronger for firms that enhance their voluntary disclosures of forward-looking information post-increase. This suggests that frequent reporting not only provides more immediate data for investors but also encourages companies to disclose more forward-looking information, enriching the informational ecosystem for market participants.
Interestingly, the study also uncovers that investors adjust their valuation models post-increase, attributing more weight to long-term earnings prospects over near-term financial outcomes. This shift underscores the potential of frequent reporting to mitigate the myopic tendencies often criticized by opponents of quarterly reporting, who argue it fosters an unhealthy focus on short-term results.
The implications of these findings are far-reaching, particularly for ongoing policy debates regarding the optimal frequency of financial reporting. Critics of quarterly reporting suggest it encourages short-termism, proposing a return to semiannual reports to alleviate pressure on firms to deliver immediate results. However, D’Adduzio and her colleagues‘ research offers compelling evidence to the contrary, suggesting that more frequent reporting enhances the market’s ability to forecast future earnings and supports the Securities and Exchange Commission’s (SEC) decision to uphold quarterly reporting standards.
By highlighting the nuanced benefits of frequent financial reporting, this study contributes to a more informed discourse on how regulatory frameworks can best support effective market functioning. It argues persuasively that the benefits of frequent reporting extend beyond the mere provision of timely financial data, enhancing the overall quality of investment decision-making and promoting a longer-term perspective among investors.
For a deeper dive into this insightful study and its implications for investors, policymakers, and corporations alike, readers are encouraged to access the full article, „Does More Frequent Financial Reporting Bring the Future Forward?“ by Jenna D’Adduzio, David S. Koo, Santhosh Ramalingegowda, and Yong Yu, available in Accounting Horizons.