BREAKINGVIEWS-Efficient markets will sustain quarterly reporting

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jeffrey Goldfarb

NEW YORK, August 3 (Reuters Breakingviews) - The market’s verdict on financial reporting cadence is in: Four times good, two times bad. Of some 113,000 public comments submitted to the U.S. Securities and Exchange Commission, 264 support a proposal to let publicly traded companies disclose details about their performance semi-annually instead of quarterly; the other 99.5% are opposed. It would take bravery from the agency and CEOs to defy such resistance.

President Donald Trump is a vocal and influential 265th proponent of giving boards flexibility to publish earnings every six months if they choose. He leads a small chorus singing the praises of associated cost savings and reduced management myopia. Oil producer ExxonMobil XOM.N and drug maker Eli Lilly LLY.N are among those to say they would take advantage of less frequent reporting requirements. Other corporate lobbyists, including the Business Roundtable, also back the plan, which follows similar approaches in Britain and elsewhere.

Dissent is overwhelming, however. Even setting aside some 66,000 form letters, based on tallies by Professor Tzachi Zach at Ohio State University’s Fisher College of Business, the message from investors could not be clearer. Fund management goliath Vanguard, for one, pushed back against the proposal and makes the case that quarterly reporting, in place since 1970, helps companies lower their cost of capital while improving price discovery and reducing information asymmetry. The SEC’s three-part mission is to facilitate capital formation, keep markets efficient and, most importantly as retail money floods into stocks, protect investors.

It’s hard to believe that greater opacity would provide any material benefits. The SEC assumes 20% of companies would switch to semiannual reporting, each saving about $200,000 a year in direct compliance costs. The sum is nowhere near enough to influence a decision to go public, which advocates of the plan assert would be an additional benefit. Moreover, CFOs have to maintain reliable financial information, even if it's released less often.

Absent more rigorous and compelling evidence, SEC Chairman Paul Atkins would struggle to defend the rule in court, as he might have to do. Even if the agency overcame any legal challenges, chief executives opting to abandon or dilute their quarterly dispatches would find themselves under siege from aggrieved shareholders in the public square and ballot initiatives.

There’s broader consensus about trying to find more sensible ways to encourage initial public offerings and long-term boardroom thinking. Targeting other compliance burdens and executive-compensation plans would be better areas of focus than less rigorous and regular financial updates. The investor feedback mechanism should, with luck, help keep the regulatory market efficient.

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CONTEXT NEWS

The Securities and Exchange Commission received 112,991 letters responding to its proposal to give publicly traded companies the option of reporting financial results twice a year instead of four times, according to a July 18 tracker created by a professor at Ohio State University's Fisher College of Business.

About 99.5% of the feedback opposes the plan, based on the analysis.

(Editing by Jennifer Saba; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GOLDFARB/jeffrey.goldfarb@thomsonreuters.com))