A blog series exploring stock market life from a listed company CEO’s perspective.
Can a listed company escape the downsides of quarterly capitalism by reporting to investors less frequently, or more frequently?
In the United States, widely assumed to be the birthplace of quarterly capitalism, listed companies have been required to report their development on a quarterly basis since 1970. Lately, however, a debate has emerged in the US about abandoning the practice, amid fears that short-termism is already harming the country’s economic development. A Forbes article covering the topic at length reveals that surveys of company executives repeatedly surface concerns about the costs and disruptions caused by short-cycle reporting. The problem identified is short-termism linked to the pressures of the quarterly reporting cycle. Companies develop a tendency to sacrifice long-term strategic investments, adjust the timing of accounting entries, and make other trade-offs in order to hit quarterly earnings targets. I wrote about stumbling into a somewhat similar situation in Part 2 of this blog.
The quarterly reporting practice can also cause speculative distortion or mispricing around earnings releases. The phenomenon is known as the “Earnings Game,” characterised by unusual volatility and stock mispricing around results day, creating fertile ground for market manipulation, insider abuse, or plain empty speculation. On earnings days, every line of the report gets scrutinised against analyst consensus forecasts, and a quarterly earnings miss or beat can then swing market capitalisation by ten percent.
In the EU, reporting obligations are more flexible. A shift to half-yearly reporting became possible in 2015. Companies can choose to report only twice a year, or publish a lighter business review quarterly. Pure half-yearly reporting never really caught on in the Nordics. At the time, a number of companies on the Helsinki Stock Exchange moved to semi-annual reporting but then switched to a lighter quarterly business review. Apparently their owners weren’t happy about the reduced flow of information. Shares of companies reporting twice a year would sit in a kind of quiet limbo for six months, and then twice a year on results day the stock would lurch in one direction or another depending on the numbers. Six months is a long time for investors to be guessing at where the company’s development is heading. Earnings days built up enormous tension.
In its own reporting, Inderes has chosen a model that aims to make use of the flexibility EU regulation allows, keep reporting lightweight, but offer investors maximum transparency. We publish the mandatory half-yearly report twice a year. Quarterly (Q1 and Q3) we publish a lighter business review. In our view it contains everything investors need to know about the quarter, while saving our finance team the work of producing, for example, a full income statement, balance sheet, and cash flow statement. As a distinctive feature, we publish our revenue figure monthly as a press release. There we’ve taken things to the other extreme, and based on this experiment, successfully.
Monthly reporting is a rarity both in Finland and elsewhere. We drew inspiration for it from Gofore. Another IT services company, Witted, has since followed suit. Kesko and Finnair also publish monthly volume data, among others.
The reasons for switching to monthly reporting were both internal and external. We were already reporting development to the entire staff on a monthly basis internally before the listing, and we wanted to continue that practice after listing without the complications of insider lists. Externally, we wanted to give investors as real-time a view as possible into business development. If material information reaches investors a little more frequently, it makes the stock more interesting, we thought.
The administrative overhead of monthly reporting is really small. Our monthly financial reporting runs on a regular cycle regardless, so pushing it out as a press release takes very little time. We’ve occasionally struggled with what to write in the release commentary. It’s a press release, so the language can’t carry material or forward-looking new information. When revenue growth is something like 4% year-on-year, it’s hard to spin an interesting story out of that. We’ve kept the text sections short and the tone deliberately laconic.
After four years, the experience with monthly reporting is positive. The monthly reports do generate discussion among investors, and they occasionally get picked up as news by the media. I believe our owners value the transparency they provide.
So what was the unexpected thing that happened? Here I have to admit to readers that I used a clickbait headline (we at Inderes haven’t taken a formal position on avoiding clickbait). The most unexpected thing about monthly reporting was, in fact, that nothing unexpected happened. When investors already have a good sense of the quarter’s revenue before the results are in, our quarterly earnings releases have mostly been fairly surprise-free, and stock price movements on results days have been really small. At least in this respect, we’ve found the cure for the quarterly capitalism “Earnings Game” by moving towards more frequent reporting rather than less. Perhaps the US should follow Gofore’s lead.
