22 July 2013

FT: Quarterly reports come too late for modern investors

Mark Schneider looks at how information technology has reshaped the world of finance, saying that there is one part of the industry where it appears to be frozen in time: quarterly reporting.

Regulation has already significantly increased over the past decade – think Sarbanes-Oxley and Dodd-Frank – creating a much greater burden of disclosure. But improving reporting speed can actually bring a significant benefit to companies and their chief financial officers – namely, the reduction of their cost of capital.

A growing body of scholarly research indicates a strong link between information quality and a company’s cost of capital. Without detailed knowledge of up-to-date business information, investors form expectations about quarterly results that invariably prove to be wrong, creating uncertainty that adds an “information gap” risk premium on to the underlying true cost of capital.

Increasing the speed of reporting can deliver other benefits to both investors and companies. Businesses would benefit from improved internal financial controls as a result of a streamlined reporting structure. The timeliness of operating decisions would improve with more frequent disclosures. Investors would benefit from tighter financial management.

A vision for the future includes an online live stream of revenue data as the underlying sales are being recorded, along with the daily virtual closing of the books to arrive at profitability data. This data would be confirmed with quarterly and annual filings that are subject to the full array of current audit and certification requirements.

Full article (FT subscription required)

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