UCLA Law Professor Stephen Bainbridge recently submitted a comment letter supporting the SEC’s proposal to permit semiannual reporting.  Among other things, the letter acknowledges that a “status quo bias” will deter many companies from initially making the switch, and then goes on to speculate about what types of companies are likely to eventually opt-in. These excerpts provide some details:

Smaller Companies with Higher Reporting Costs. The most natural candidates for electing semi-annual reporting are smaller reporting companies for whom the compliance burden of quarterly reporting is highest relative to the informational benefit investors derive from it. As noted above, the quarterly preparation of Form 10-Q—including financial statement preparation, auditor review, MD&A drafting, and officer certification—imposes fixed costs that fall disproportionately on companies with smaller finance and legal functions.

Companies with Longer-Horizon Investor Bases. Companies whose investor bases have longer investment horizons are also more likely to elect semi-annual reporting successfully. Companies with significant founder or family ownership, companies backed by patient institutional capital, and companies in industries where current-period earnings are poor proxies for long-run value are natural candidates.

Industry Considerations. Certain industries present a natural fit for semi-annual reporting. Companies engaged in long gestation projects—biotech and pharmaceutical firms awaiting regulatory approvals, capital-intensive infrastructure and energy companies, and early-stage technology firms where current losses are priced against multi-year growth expectations—may find that quarterly disclosures add little decision-relevant information for investors already pricing future cash flows over extended horizons. The IPO evidence discussed above supports this intuition: investors in such companies are demonstrably capable of thinking far beyond the current quarter.

Prof. Bainbridge suggests that the companies least likely to depart from quarterly reporting are those with large & active institutional ownership and those in industries, like financial services, retailers with seasonal patterns, and cyclical business, where quarterly results are highly material to market valuations.

– John Jenkins