Disclosure regulation is pervasive and has been increasing in developed economies, despite regulators’ difficulty determining the socially optimal level of disclosure. Showcasing this difficulty, regulators have struggled to reach a consensus on the frequency and content of interim reporting for decades. For example, the European Union (EU) introduced mandatory quarterly reports in 2004, only to abolish the mandate in 2013, returning to a semi-annual reporting frequency for firms whose securities are trading on a regulated market within the EU.
The question of how often and how much firms should report is not trivial. On the one hand, a higher reporting frequency allows stakeholders to monitor managerial action in a timely manner, thereby disciplining managers and reducing agency costs. On the other hand, more frequent reporting may lead to managerial short-termism, lower investment efficiency, higher reporting costs, and less efficient capital allocation to firms with seasonal business.
In our study “The Consequences of Abandoning the Quarterly Reporting Mandate in the Prime Market Segment” (forthcoming at European Accounting Review), we investigate firms’ responses to the step-wise de-regulation of the quarterly reporting mandate in the prime market segment of the Vienna Stock Exchange (VSE).
Only a few firms terminate quarterly reporting entirely, while most firms reduce the content of quarterly reports predominantly by omitting the notes disclosures. We combine interview and empirical evidence to show that firms primarily consider the information needs of their key stakeholders, such as institutional (foreign) investors and analysts, as well as their transparency preferences in their interim reporting decisions. Unlike in other settings, reporting and proprietary costs are less important to prime market firms because of frequent internal reporting and integrated managerial and financial reporting.
We also analyze the potential consequences of firms’ interim reporting decisions around the de-regulation of the interim reporting mandate. Our results suggest that firms’ stock liquidity decreases following the return to a semi-annual reporting frequency or following a significant reduction of the content of quarterly reports relative to firms that continue extensive quarterly reporting. We also find that investors react negatively to the VSE’s announcement to abandon the quarterly reporting mandate in the prime market. Taken together, our results suggest that a quarterly reporting frequency is important to investors.
However, we do not find evidence that analysts’ yearly forecasts are negatively affected after firms return to semi-annual reporting or significantly reduce information in quarterly reports. This finding is in line with our interview evidence that firms and analysts are in continuous exchange through other timely information channels such as road shows and conference calls and that firms tailor their quarterly reporting to the specific information needs of key stakeholders such as analysts.
Collectively, our results suggest that stakeholders demand quarterly reporting but not necessarily full quarterly reports. Large investors and analysts primarily demand financial statement information and a few key performance metrics allowing them to update their valuation models on a quarterly basis.
Our study that is forthcoming at European Accounting Review provides more insights for regulators on firms’ interim reporting decisions and the ensuing capital market consequences.