Doing away with quarterly reporting...
No quarterly reporting is like streaming a 4K video in standard definition (SD) - it’ll look fine from afar but you won’t get the same clarity close-up.
Investors and stock punters in Singapore may have less to look forward in terms of earnings results when the new rules that do away with quarterly reporting kicks in on 7 February. I am an advocate of quarterly reporting, even if regulators now do not set this as a hard mandate for listed companies.
Dealing with the new asymmetry of information. Investors no longer have the privilege of observing seasonality in business cycles in certain fast-moving industries such as consumer and retail. This makes it potentially make it more difficult to gauge business performance, which could result in reliance on alternative sources of data including analyst research reports, stock discussion forums and market talk over kopi.
The reliability and credibility of third party information sources will become more important than ever.
“Are your quarterly financials reliable?“
With the new disclosure rules in effect, the half-year-on-half-year financial performance will gradually take precedence over the quarterly numbers. While managers will feel less pressure to show a report card every three months, these quarterly operational and financial indicators enables:
Investors to react more quickly to any near-term volatility in the business cycle and make well-informed recommendations to the board;
Management to allocate resources and budget more effectively as compared to half-yearly reporting.
A longer window of time. Without quarterly reporting, companies now have more room to move around their order book and working capital over a 6-month window instead of the usual three months. Half yearly disclosures also give companies more room and time to sweep teething issues under the carpet that could have been addressed early on through the quarterly announcements. Material and sensitive information will also have a longer time to linger within company walls and increase the temptation for insider trading.
It’s like streaming a 4K video in standard definition (SD) - it’ll look fine from afar but you won’t get the same clarity close-up.
On the private side, this should have less impact since investors may continue to request for quarterly management accounts for due diligence.
The impact on cost of capital and valuation. The basis for calculating cost of capital is predicated on risk. And risk is a function of uncertainty. For example, cost of debt is driven by viability of repayments. Financial institutions are more likely to offer more competitive rates for companies that demonstrate the ability to make quarterly repayments. More disclosures imply greater transparency and visibility which in turns reduces the risk profile of the business.
For companies that continue to maintain timely updates on their earning results, there should be some valuation premium reflected through a lower cost of capital. Companies that keep their books clean and organized on a regular basis should also be valued higher on the basis of better corporate and financial governance.
Overall, focus on the longer term. Shifting the focus off quarterly announcements will probably compel investors to take a longer term view on the company and discourage unhealthy speculation on quarterly results.
The shift to half yearly reporting will likely encourage more businesses to go public and reduce the costs for some existing listed companies. But for those companies that have fundamental problems, this isn’t going to move the needle much.