Should We Eliminate Quarterly Earnings Reports (Or, At Least, Make Them Optional)? Part 2

Situating the question in the mandatory disclosure debate

In the prior post, I discussed President Trump’s renewed call for the SEC to eliminate mandatory quarterly earnings reports. In that post, I discussed whether quarterly earnings reporting increases the pressure for managers to focus on short-term performance.

Should We Eliminate Quarterly Earnings Reports (Or, At Least, Make Them Optional)? Part 1

In this post, I want to situate the quarterly earnings reporting debate in the broader debate over mandatory disclosure.

The original federal securities law—the Securities Act of 1933—contemplated transactional disclosure. With certain exceptions, it provided that issues had to provide investors with a disclosure document—the prospectus—before selling them securities.

Of course, many companies go for years or even decades without raising money in the capital markets through the sale of securities. They fund their operations through retained earnings, bank loans, and other sources of private credit. As a result, the information provided investors via a system that depended solely on transaction-based disclosure would quickly go stale.

Congress saw this as a problem, which it addressed in the next securities law—the Securities Exchange Act of 1934. In § 13 of the Exchange Act , Congress therefore authorized the SEC to require public corporations to periodically provide investors with up-to-date disclosures:

Underlying the adoption of extensive disclosure requirements was a legislative philosophy: “There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy.” This Court “repeatedly has described the ‘fundamental purpose’ of the Act as implementing a ‘philosophy of full disclosure.’”¹

In 1962, Congress directed the SEC to study the Exchange Act disclosure regime and determine whether it was adequately protecting investors. The resulting study concluded that the existing system of Exchange Act reports was ineffective. The reports filed under it were not widely disseminated and were under utilized by investors.² Dissatisfaction with the periodic disclosure system persisted throughout the decade, culminating in the SEC’s Disclosure Policy Study (a.k.a. the Wheat Report, named after SEC Commissioner Francis Wheat).

The Wheat report recommended that the annual report (on what is now Form 10-K) should include “ a five year summary of earnings and a statement of the source and application of funds.”

The SEC responded with a comprehensive overhaul of its 1933 and 1934 Act disclosure regime. Among the changes was the adoption of the modern quarterly report on Form 10-Q as a substitute for the older form 9-K. As the SEC explained in its 1970 Annual Report:

The form calls for summarized financial information which is not required to be certified. Profit and loss information in more detail than was required by Form 9-K must also be furnished, including data on earnings per share.

Thus was born the modern quarterly earnings reporting requirement.

As with the rest of the SEC’s 1933 and 1934 Act disclosure regime, the quarterly earnings report is part of the so-called mandatory disclosure system.³

As such, it seems appropriate to situate the current discussion of quarterly earnings reporting within the broader and longstanding debate over the merits of mandatory disclosure.