Trump Ignites Wall Street Debate With His Tweet on Earnings
(Bloomberg) -- President Donald Trump brought a long-simmering debate on Wall Street to the surface Friday when he prodded regulators to look into scaling back how often publicly traded companies report financial results.
Trump’s proposal, released via Twitter, would do away with the decades-old tradition of obligating companies to file quarterly reports and move to a semi-annual system. He picked a good moment to put the idea forward: Elon Musk is in the midst of a dramatic push to take Tesla Inc. private in large part, he says, to remove the pressures of having to report quarterly earnings.
To those across the investing community in favor of less-frequent reporting, the move is just what’s needed to reduce corporate costs, boost a flagging IPO market and get companies to move away from the sort of short-term focus that can harm long-term growth. To its detractors, it is, in the words of Hilton Capital Management’s Dick Bove, “a horrible idea.”
It would be a “major move to provide less information” at a time when investors’ access to information has “already been dramatically reduced,” Bove said.
However feasible or likely the plan is, the tweet does represent the sort of business-minded approach that corporate America hoped it would get from having a former executive in the White House. While Trump’s tax cuts and deregulation push have long earned their favor -- and Friday’s proposal can be seen as part of that effort -- he has also befuddled much of the business community by dragging the country into multiple trade feuds and by jawboning companies via Twitter.
Trump said the issue was brought to his attention recently by Indra Nooyi, the chief executive officer of PepsiCo Inc.
Nooyi issued a statement Friday about the conversation with the president, saying that many market participants “have been discussing how to better orient corporations to have a more long-term view. My comments were made in that broader context, and included a suggestion to explore the harmonization of the European system and the U.S. system of financial reporting.”
Europe has backed away from requiring companies to file quarterly reports. The most recent data from the U.K. shows that only 57 of the companies in the benchmark FTSE 100 index were still issuing quarterly reports as of September 2017, according to the Investment Association. Japan, though, moved in the opposite direction, gradually forcing companies to shift from semi-annual to quarterly reporting during the 2000s.
The discussion with Pepsi’s CEO wasn’t the first time White House officials have heard from the business community about quarterly reporting requirements. Other corporate leaders have raised the matter with White House officials, and the administration has been considering the issue for some time. Well-known chief executives, including JPMorgan Chase & Co.’s Jamie Dimon, Berkshire Hathaway Inc.’s Warren Buffett and BlackRock Inc.’s Larry Fink have raised concerns about the focus placed on earnings reports and guidance.
“I’m encouraged to hear people from both sides of the aisle talking about the need to promote corporate behavior that’s more focused on the long-term, though the precise policies for getting there need to be thoughtfully examined and debated,” Fink said in a statement Friday.
Investor reaction to the idea was mixed. Some said the change could help companies to invest more in their businesses rather than race to show profit gains each quarter. Others said that the prospect of fewer financial reports could exacerbate price swings around earnings or fuel insider trading.
“Imagine the volatility you would get,” billionaire money manager Stanley Druckenmiller said Friday in an interview. He also said he would find it challenging not to get information every quarter because so much can change in six months.
While the quarterly earnings season has a negligible impact on market-wide volume, it does coincide with an increase in price turbulence among individual companies. Using Bloomberg data that looks at 10-day volatility in single stocks since 2010, price swings during the four reporting periods are roughly 10 percent higher than in the rest of the year.
The U.S. Chamber of Commerce and other lobbying groups have also blamed compliance burdens for preventing more companies from selling shares. A statistic they often point to is the drop in IPOs over the past 20 years. In 1996, almost 950 companies went public, according to data compiled by Bloomberg. That number fell to 237 in 2017.
The reduction in transparency could encourage insider trading, said Robert Pozen, senior lecturer at MIT Sloan School of Management and former vice chairman of Fidelity Investments.
“You have such a long dark period where there is no information going out to the public,” Pozen said. “You’re dramatically increasing the temptation for people to trade” on inside information, he said.
The SEC has been reluctant to make changes in quarterly reporting, which has long been a cornerstone of U.S. capital markets. Even SEC Chairman Jay Clayton, a Trump appointee who has made boosting the number of initial public offerings one of his top priorities, hasn’t floated the idea of scaling back reporting requirements.
On Friday, Clayton said in a statement that many investors and market participants share the president’s perspective “on the importance of long-term investing” and that the SEC’s corporate finance division is continuing to study company reporting requirements.
The agency could make such a change without Congress passing legislation but that doesn’t mean it will, said David Martin, an attorney who previously ran the agency unit that oversees corporate filings.
But critics contend that new reporting requirements may not spur meaningful change given the deluge of company information available on social media.
“A lot of people feel it will promote a more long-term perspective. But that ship has sailed,” said Nell Minow, vice chair of ValueEdge Advisors, a firm that advises institutional investors on corporate governance issues. “Information comes out so differently these days. I’m not sure the earnings reports make that much of a difference.”
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