Opinion

Scrap Quarterly Reporting

By Baruch Lev

So, forget managerial myopia. There is a much better reason to scrap quarterly reports: they aren’t useful anymore.

Last Friday, President Trump asked the SEC to examine the elimination of quarterly financial reports. The President mentioned an executive (apparently Indra Nooyi, outgoing CEO of PepsiCo (PEP)) who told him that eliminating quarterly reporting will enhance executives’ long-term orientation, thereby increasing investments and jobs. A panacea. I believe terminating quarterly reports is the right move, but for the wrong reasons.

Eliminating quarterly reports won’t reduce corporate managers’ myopia (short-termism), simply because managerial short-termism is a myth. The empirical evidence on short-termism is weak and mixed, at best, and several studies reject it outright. But you really don’t need any elaborate research to dismiss managerial myopia - just common sense. Would managers, allegedly obsessed with increasing quarterly earnings, invest over $2.0 trillion (yes, trillion) annually in long-term intangible assets (R&D, IT, brands, designs, unique business processes), when much of this investment hits the bottom line (expensed in the income statement)? Of course not. (The calculation of aggregate investment in intangibles was performed by economists Carol Corrado and Charles Hulten.) Just the aggregate annual investment in R&D - all expensed by accountants - exceeds $350 billion. And if managers are short-term oriented, increasing quarterly earnings at the expense of long-term growth, how to explain the decades' long growth in U.S. corporate sales and earnings? If this is short-termism, let’s have more of it.

So, forget managerial myopia. There is a much better reason to scrap quarterly reports: they aren’t useful anymore.

Read the full Seeking Alpha article.

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Baruch Lev is the Philip Bardes Professor of Accounting and Finance.