TUM Management Insights
Myopic managers: the impact of mandatory quarterly reporting on managerial behavior
Many criticize that the “quarterly capitalism” of managers, investment funds and of financial analysts is leading to short-term behavior at the cost of long-term welfare. One important determinant of quarterly capitalism certainly may be the mandatory requirement for quarterly reports in the US and in many other jurisdictions around the world. In 2000, Warren Buffett, Chief Executive Officer (CEO) of Berkshire Hathaway, addressed this issue in a letter to shareholders and encouraged managers to focus on long-term strategies rather than on quarterly earnings (Berkshire Hathaway 2000). In Germany, Porsche, the German sports car manufacturer, refused to issue quarterly information, even at the expense of not being included in the MDAX, a prestigious stock market index. The discussion about the real effects of quarterly reporting intensified in the wake of the 2008–2009 international financial crisis. At that time, the CEO of Korn/Ferry International, Gary Burnison, noted:
“If there is a villain at the heart of the current crisis, it’s quarterly results. As regulators and Congress look at what went wrong with the markets, the place to start is with practices that make businesses think short-term.” (Burnison 2009)
While prior research provides evidence of the advantages of quarterly reporting in terms of higher transparency and thus higher market liquidity, a recent paper by Ernstberger/Link/Stich/Vogler examines how mandatory quarterly reporting affects managers’ business decisions in terms of real activities manipulations. As a setting for their tests, they use the European Union, where the reporting frequency was increased following the introduction of a mandate to issue Interim Management Statements (IMSs) on a quarterly basis. In addition, several countries already had requirements in place and firms in these countries act as a control group. The authors find an increase in real activities manipulations for firms mandated to switch from semiannual to quarterly IMS reporting, relative to the control firms. This finding is in line with the notion of higher managerial short-termism resulting from increased reporting frequency requirements. Furthermore, the paper provides evidence that reporting frequency-induced real activities manipulations are more pronounced if the price pressure from investors is high and if the informativeness of IMS disclosure is low. The authors also document that reporting frequency-induced real activities manipulations are followed by a short-term increase and then a decrease in firms’ operating performance which illustrates quarterly reporting’s harm to economic welfare.
Technical University of Munich
TUM School of Management