In recent years, one of the questions that has divided financial regulators is how frequent publicly listed companies should disclose their earnings to investors.
Now there are two camps in this debate. The first are those who believe that the high frequency of disclosures keeps executives accountable by influencing them to make better decisions and also helps investors make informed choices.
On the other hand, those opposed believe that high frequency of disclosures negatively influences executives to make decisions that are short-term at the expense of long-term investors who end up being victims of those short-term decisions.
There is a thicket of cases where the argument made by the latter stands true. One crazy example was a company called Centennial Technologies in 1996, which reported making $2 million in revenue from PC memory cards.
However, the company was shipping fruit baskets to customers and faked documents to show increased revenue was from selling PC memory cards.
The increased revenue from shipping fruit baskets increased the stock of the company by 451 percent on the New York Stock Exchange only for 20,000 investors to lose most of their investment in the company.
The other example is that of Bernard Madoff who kept the losses of his company hidden by paying early investors with money raised from new investors.
Through this ponzi scheme, his company consistently recorded an 11 percent gain every year for 15 years only for investors to lose $50 billion when the fraud ran out of time.
In Kenya, there are also a litany of publicly listed cases who have misled investors about the profitability of the company through creative accounting only for investors to lose their investments — from Mumias Sugar to Uchumi and CMC. This makes this debate relevant to us too.
The Trump administration was one of the leading opponents of frequent reporting and pushed for a review by reducing the frequency of public companies in the US to a semi-annual basis from the current quarterly system.
The US Securities and Exchange Commission requires public companies in the US to report quarterly earnings in a standard manner.
This move by the Trump administration created a storm, with those opposed saying that there will be significant temptation for companies to cover up missteps and that there was a great danger of increased insider trading.
But the Biden administration has signalled that it won’t follow its predecessor on the path of reducing earnings reporting. The UK moved the opposite direction from semiannual to quarterly reporting in 2007, whilst the European Commission removed the quarterly reporting in 2013.
Are investors inundated with information by publicly listed companies?
Interestingly, the US Chamber of Commerce’s Centre for Capital Markets Competitiveness is one of the parties asking for an evaluation of the quarterly earnings reporting, saying investors stand to benefit more from limited disclosures and that this will lead to better market discipline and more efficient allocation of capital.
There is a group of scholars who argue that frequent disclosures have been one of the factors encouraging companies to indulge in creative accounting to assure investors of short-term goals of profit-seeking. The infamous Enron scandal, which made the phrase “cook the books” a household name, comes to mind.
There are studies that show privately held companies not subjected to quarterly earnings reporting have been more responsive to changes in investment opportunities than the ones that are publicly listed. For publicly listed companies, they were less responsive to stock prices reflecting strongly on quarter earnings releases.
A good example is Manchester United, listed at the New York Stock Exchange, it’s been argued that its current streak of sacking managers has to do with chasing profits and value of the company — business decision over football strategy.
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