The frequency at which public companies must report financial information to investors has been the subject of intense debate in the European Union, Asia, and more recently the United States. For example, the Securities and Exchange Commission (SEC) is examining the pros and cons of giving U.S. companies the flexibility to report on a semi-annual basis (SEC, 2018). While previous studies have espoused the benefits of more frequent quarterly reporting in reducing information asymmetry and the cost of capital, much of the recent debate has been centered around concerns that quarterly reporting would impose significant preparation costs and encourage short-termism among managers and market participants. However, largely overlooked is whether and how reporting-frequency choices made by one company may generate spillovers or unintended costs to other companies. One possible way is through the reallocation of investor attention. In a recent research paper, we ask: When many of a company’s peers report at a higher frequency, what happens to the attention the company receives from investors? We provide novel evidence that companies lose investor attention when their peers report quarterly rather than semi-annually, in a semi-annual reporting setting where the peers have the option to report quarterly.
The simple explanation for why this happens is that investor attention is limited. Kahneman (1973) argues that when individuals allocate their cognitive resources across tasks, allocating attention to one task will reduce the attention available for other tasks. In the capital markets, studies have found that investors tend to focus on a sub-set of stocks that grab their attention (e.g., Barber and Odean 2008), and fail to properly impound earnings news when their attention is spread across multiple stocks or multiple news announcements (e.g., DellaVigna and Pollet 2009; Hirshleifer et al. 2009). Based on this evidence, we conjecture that more frequent reporting increases the demands on investors’ limited attention. If some of a firm’s peers shifted from semi-annual to quarterly reporting, investors would need to process twice as many financial reports if they wanted to stay informed about those peers. Thus, if investors choose to allocate some of their attention to the quarterly reports of the firm’s peers, they would likely have to divert some attention away from the firm. Consequently, the loss of investor attention may result in adverse market consequences to these companies in the form of a lower market value, reduction in market liquidity, and a higher cost of capital. We predict that companies whose peers increase their reporting frequency lose investor attention, and as a result, experience adverse market consequences.
We examine this issue using a broad sample of over 8,000 listed companies across 22 regulated markets within the European Union over the last 16 years. In contrast to the quarterly reporting regime in place in the U.S. since the early 1970s, the European Union has historically mandated semi-annual reporting. Proposals to mandate more frequent reporting within the EU have consistently been rejected on the grounds that quarterly reporting is too burdensome for companies and does not serve the long-term interests of investors (Kay, 2012; Rahman et al. 2007). While interim management statements (IMS) were required between 2007 and 2013 – primarily narrative information on performance and material events – they were eventually abolished. The EU reporting landscape is effectively two-tiered, where companies are mandated to report at semi-annually, but many voluntarily provide earnings information quarterly. This allows us to exploit the variation in reporting frequency across, and within, countries and industries to estimate the loss of investor attention experienced by companies when their peers report quarterly.
In our empirical tests we relate various measures of firm-level investor attention to the concentration of quarterly reporting among a firm’s peers. We measure the concentration of quarterly reporting as the fraction of the firm’s peers in the same country-industry group that report earnings on a quarterly basis, while we capture investor attention with several measures related to analyst coverage, analyst activity, and trading volume. The goal of our empirical design is to capture the effect on investor attention from changes in quarterly concentration.Our paper focuses on quarterly reporting of earnings, which was voluntary in the EU during our sample period. We note that Interim Management Statements (IMS’s), which were required in the EU between 2007 and 2013, only required narrative information. So firms that had to report IMS’s still had the choice of whether or not to report earnings on a quarterly basis. The impact of the mandatory IMS’s should be controlled for by the industry-time fixed-effects. Across all our measures, we find that companies lose attention when a greater concentration of their peers voluntarily adopt quarterly reporting. Interestingly, we also find that companies see an increase in attention when they themselves adopt quarterly reporting, suggesting that the quarterly reporters are diverting attention away from other companies within the capital market.
Next, we examine whether the observed loss in investor attention is associated with negative market outcomes. Prior work predicts that a firm losing investor attention will also see a drop in its market value (e.g., Merton 1987). We find that companies experience a drop in market value when a greater concentration of their peers adopt quarterly reporting. We also examine whether companies lose market liquidity, as measured by average daily price impact – i.e., the extent to which trading in a stock moves its price. We anticipate that companies may suffer a reduction in liquidity as investors shift their attention away from firms, since less demand for trading in a stock may increase the price impact of trades (e.g., Ding and Hou 2015; Kyle 1985). Consistent with these arguments, we find that a company’s market liquidity deteriorates when a greater concentration of its peers report quarterly. Taken together, our results suggest the peers’ choice to report more frequently imposes a cost on the company. Strikingly, we don’t find any evidence of benefits – i.e., greater price discovery or forecast accuracy – to companies when their peers voluntarily adopt quarterly reporting.
We provide additional findings to corroborate our main finding. First, we find that the observed loss in investor attention tends to be concentrated in semi-annual reporters (as opposed to quarterly reporters), indicating that investors shift their attention away from existing semi-annual reporters towards quarterly-reporting peers. This supports the notion that investors prefer to devote attention to companies that provide more information. Second, to alleviate concerns that our results in the voluntary setting are driven by self-selection, we examine Singapore where, in 2003, the Singapore Exchange (SGX) mandated quarterly reporting for listed companies with a market capitalization greater than S$75 million. As a result, industries with a higher concentration of large companies saw a greater increase in the concentration of quarterly reporters following this mandate. Following the reporting mandate, we find a sustained decrease in analyst attention for companies with a higher concentration of peers that were required to adopt quarterly reporting.
Our contribution is three-fold. First, While the SEC requested comment from the public on measures to cut down the “burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections” SEC Chairman, Jay Clayton, has struck a more neutral tone, stating that, “Our markets thirst for high-quality, timely information regarding company performance and material corporate events. We recognize the importance of this information to well-functioning and fair capital markets. We also recognize the need for companies and investors to plan for the long term. Our rules should reflect these realities.” [SEC, 2018]By highlighting the potential consequences of a regime where companies are allowed to choose different reporting frequencies, our evidence informs the policy debate and has implications for companies subject to this type of regime, i.e., companies may want to report more frequently than the minimum required to capture a greater share of investor attention. Moreover, our findings speak to the need for more research on whether a maximum reporting threshold may be more desirable than enforcement of a minimum reporting threshold. Second, while prior studies indicate that investors rely on information contained in peer-firm disclosures, leading to positive information spillovers in a variety of different contexts (e.g., Foster 1981; Shroff et al. 2017; Wang 2014), we offer a contrasting view by providing evidence of negative spillovers in the form of reduced investor attention stemming from peers’ higher reporting frequency. Finally, we identify a novel factor – financial reporting frequency – that can influence the attention investors allocate to stocks, which can in turn affect market value and liquidity.
Barber, B.M., and T. Odean (2008). All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors. Review of Financial Studies 21(2), 785-818.
DellaVigna, S., and J.M. Pollet (2009). Investor inattention and Friday earnings announcements. Journal of Finance, 64(2), 709-749.
Ding, R. and W. Hou (2015). Retail investor attention and stock liquidity. Journal of International Financial Market, Institutions and Money, 37, 12-26.
Foster, G. (1981). Intra-industry information transfers associated with earnings releases. Journal of Accounting and Economics, 3(3), 201-232.
Hirshleifer, D., S.S. Lim, and S.H. Teoh (2009). Driven to distraction: Extraneous events and underreaction to earnings news. Journal of Finance, 64(5), 2289-2325.
Kahneman, D. (1973). Attention and effort, Volume 1063. Published by Citeseer
Kay, J. (2012). The Kay Review of UK equity markets and long-term decision making. Final Report, July 2012. Available at: https://www.gov.uk/government/consultations/the-kay-review-of-uk-equity-markets-and-long-term-decision-making
Kyle, A.S. (1985). Continuous auctions and insider trading. Econometrica: Journal of the Econometric Society, 1315-1335.
Merton, R.C. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42(3), 483-510.
Rahman, A.R., T.M. Tay, B.T. Ong, and S. Cai (2007). Quarterly reporting in a voluntary disclosure environment: Its benefits, drawbacks and determinants. The International Journal of Accounting, 42(4), 416-442.
Securities and Exchange Commission. (2018). Request for Comment on Earnings Releases and Quarterly Reports. Release No. 33-10588 December 18, 2018. Available at: https://www.sec.gov/rules/other/2018/33-10588.pdf
Shroff, N., R.S. Verdi, and B.P. Yost (2017). When does the peer information environment matter? Journal of Accounting and Economics, 64(2-3), 183-214.
Wang, C. (2014). Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), 955-992.
This post comes to us from Professor Emmanuel T. De George at the University of Miami; Minh Phan, a PhD candidate at Columbia Business School; and Professor Robert C. Stoumbos at Columbia Business School. It is based on their recent article, “Financial Reporting Frequency and the Allocation of Investor Attention,” available here.