{"text":[[{"start":6.85,"text":"The writer is a managing director at Frontline Analysts and author of “The Unaccountability Machine”"}],[{"start":13.2,"text":"When IBM realised recently that AI was changing corporate IT spending in not a good way for its mainframe business, it did the right thing. "}],[{"start":21.9,"text":"Rather than waiting for the next set of quarterly results to give investors the bad news, it filed an immediate report known as an 8-K, warning on its earnings. Although it might not have felt great for shareholders, who suffered a 25 per cent loss following the news, this was much better than allowing a false market to exist with investors buying or holding shares unaware of the coming bad news."}],[{"start":44.4,"text":"But the temptation must have been mighty, particularly since the date of the second-quarter earnings release was only eight days later. In general, US corporations tend to use quarterly reporting to give news about changes in trading conditions and updates to expectations. Unscheduled announcements between quarters are very much the exception rather than the rule."}],[{"start":64.65,"text":"Obviously, a false market that only lasts a couple of weeks is much less of a problem than one that goes on for months. So if the US does decide to move to semi-annual reporting, as the Securities and Exchange Commission has proposed, it will also need to change its culture when it comes to trading updates and profit warnings. The proposals have triggered a huge backlash against the move. But it could be beneficial if done in the right way."}],[{"start":89.95,"text":"The quid pro quo for less frequent reporting for companies listed on UK and European exchanges is that they have an obligation for continuous disclosure. At any time, if the gap between market perception and the management’s private information about company performance becomes too large, it must be closed with an announcement. In practical terms, this usually means that if consensus estimates are known to be more than 10 per cent out in either direction, some kind of press release is warranted."}],[{"start":119.75,"text":"In the US, the disclosure requirements are formally set by the SEC, but in practice are determined by what you can win a shareholder lawsuit over. Reports need to be filed on Form 8-K for major corporate events like mergers, divestments and big contract wins, but there is no specific requirement to update the market simply because macroeconomic or trading conditions have changed. After all, investors find out anyway in less than 90 days."}],[{"start":146.8,"text":"The most important exceptions to this rule at the moment are when management have previously given earnings guidance but chance has conspired to make liars of them. If past statements have been rendered untrue by events, a company is on risky ground when it comes to litigation, and so is more likely to correct the record."}],[{"start":166.60000000000002,"text":"But this is an unsatisfactory way to handle disclosure. It can’t be right that updates are determined not by the importance of news, but by how embarrassing they render past statements. Quite apart from anything, this provides a powerful incentive for management to stop saying anything useful about their expectations. And indeed, the proportion of US firms that give material earnings guidance has fallen dramatically, according to a study by Wachtell, Lipton, Rosen & Katz. Since the pandemic, only about a quarter of companies bothered to reinstate it. Less than half of the S&P 500 even give any guidance on an annual basis."}],[{"start":204.35000000000002,"text":"The costs and benefits of quarterly reporting are somewhat overstated. The UK introduced a requirement for it in 2007, then dropped it in 2014. Researchers did not find any measurable change in short-termist behaviour, but nor did they find any material difference in market efficiency or valuation."}],[{"start":224.60000000000002,"text":"But it is possible to get the worst of both worlds, if the US were to move to semi-annual reporting while keeping the guidance and disclosure norms established under its previous regime. If communication between a company and its shareholders continues to be shaped by guesses about what might look good or bad in a court, it’s unlikely to be done well."}],[{"start":244.95000000000002,"text":"And companies need to talk to investors about all sorts of things. Understanding a set of accounts needs to come from understanding the underlying business, not the other way around. The best argument against quarterly reporting is that it wastes management time while flooding investors and analysts with largely useless information, diverting their attention to things that don’t matter. "}],[{"start":270.55,"text":"A better system would be one where more companies followed IBM’s example and made an announcement of important news, when it mattered, rather than following any calendar."}],[{"start":288.00000000000006,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1784963594_8997.mp3"}