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I’m not going to pretend that I’ve waded through the avalanche of comments on the SEC’s semiannual reporting proposal, but with some notable exceptions, many of the comments I’ve seen shed more heat than light on the benefits and detriments of a semiannual reporting option for public companies. That’s why I found this recent study comparing Europe’s semiannual reporting regime with the United States’ quarterly reporting regime interesting.

The study, which appeared in The International Journal of Financial Studies, compared quarterly reporting DJIA firms with semiannually reporting STOXX 50 firms, to assess how the cadence of disclosures affects market reactions to earnings news. It’s worth noting at the outset that this study focused on some of the largest of the large caps, so caution is warranted before applying its conclusions across the public company universe. But with that caveat, here’s an excerpt from the study’s conclusion:

Our comprehensive analysis, comparing quarterly reporting DJIA firms with primarily semiannual-reporting STOXX firms, reveals a profound influence of disclosure frequency on the intensity, duration, and volatility of earnings-related price reactions. Quarterly reporting, for instance, compresses price discovery into shorter windows, significantly accelerating information assimilation and reducing the persistence of post-announcement mispricing.

This expedited information flow facilitates faster capital reallocation, enhancing market allocative efficiency. However, this substantial informational benefit is accompanied by a significant drawback: sharper short-term volatility spikes, particularly during periods characterized by high market volatility, in response to negative earnings surprises, and within cyclically sensitive sectors where investor expectations are inherently more susceptible to shifts.

Conversely, semiannual reporting presents a different set of trade-offs. While it effectively mitigates contemporaneous noise and lowers short-term volatility, thereby dampening apparent overreactions, these benefits come at the cost of slower and more gradual information absorption. When markets remain underinformed, this extended period can widen risk premium and delay crucial capital reallocation in response to fundamental information.

The authors conclude that the data indicates that the two alternative reporting cadences involve inevitable tradeoffs: quarterly reporting results in faster information processing by the market and more transparency, while semiannual reporting mitigates short-term market instability and overreactions.

Given the tradeoffs the study identified, the authors argue that a more complex regulatory approach than that embodied in the SEC’s current proposal may be optimal:

Advocating for a uniform or monolithic disclosure cadence across all market environments may not achieve an optimal outcome. Instead, a more adaptive regulatory framework, one that allows for tailored disclosure guidance based on specific factors such as sectoral sensitivity to economic cycles, the prevailing macroeconomic conditions, and the inherent complexity of information within an industry, could strike a more effective balance between market transparency and stability.

Honestly, this is where they lost me. This “adaptive regulatory framework” sounds like a complicated mess that only an academic could love. Sometimes, I think that people who read and write about disclosure for a living think that companies exist to satisfy their unending desire for an avalanche of trivial information more disclosure and more intricate disclosure requirements. Unfortunately for them, the people running those companies think they’re in business to make money.

– John Jenkins