The Effect of Mandatory Quarterly Reporting on Firm Value

Abstract

<jats:title>ABSTRACT</jats:title> <jats:p>We exploit a regulatory change in Singapore to analyze the capital market effects of mandatory quarterly reporting. The listing rule implemented in 2003 has required firms with a market capitalization above S$75 million—but not firms with a market capitalization below this threshold—to publish quarterly financial statements. Using regression discontinuity analysis for our identification, we provide novel evidence of the causal effects of mandatory quarterly reporting on small firms. We find a 5 percent decrease in firm value, consistent with the notion that mandatory quarterly reporting is perceived as a net burden for small firms. Contrary to popular belief, we cannot find evidence of informational benefits or myopic investment for firms around the threshold. Additional tests suggest positive information spillover effects from large mandatory quarterly reporters to non-quarterly reporting firms.</jats:p> <jats:p>JEL Classifications: M41; M48.</jats:p>

Interim Reporting and Managerial Short-termism

“…In contrast, another number of recent studies e.g. (Call, Chen, Esplin, & Miao, 2016;Kajuter, Klassmann, & Nienhaus, 2018;Nallareddy, Pozen, & Rajgopal, 2017) find no relationship between the frequency of financial reporting and managerial short termism. These null relationship is consistent with the theoretical insight that, for frequent disclosure to affect myopia, it needs to change the mix of "hard" information such as earnings ‫المجلد‬ ‫ال‬ ‫عاشر‬ ‫العدد‬ ‫ال‬ ‫ثالث‬ ‫األول‬ ‫الجزء‬ 9102 versus "soft", unverifiable information firms disclose to the market.…”

“…On the other hand, other studies e.g. (Kajuter, Klassmann, & Nienhaus, 2018;Nallareddy, Pozen, & Rajgopal, 2017) find no relationship between the frequency of financial reporting and the management focus on the long term growth. The evidence supports the notion that, for disclosure to affect myopia, it needs to change the mix of hard information such as earnings versus soft, unverifiable information that firms disclose to the market.…”

“…According to influential survey, Graham et al, (2005) report that corporate executives admit cutting capital expenditures and avoiding equipment maintenance in order to meet short term earnings targets. Moreover, Asker et al, (2015), Ladika & Saunter, (2013) as well as Kajuter et al, (2018) find large sample archival evidence that managerial myopia can indeed manifest in the form of reduced capital expenditures, reduced fixed assets. Brochet et al, (2015) find that short-term oriented companies invest less in R&D and advertising, suggesting that these companies sacrifice investments with longterm pay-offs to maximize their current financial performance.…”

“…Using a sample of 548 public firm listed on the stock exchange of Singapore in 2003, Kajuter et al, (2018) investigates the effect of mandatory quarterly reporting on the firm value through three channels: liquidity, compliance cost and short termism. Through the short termism channel, they find no evidence for the myopic investment behavior caused by increased reporting frequency.…”

“…Third, this research cannot rely on quarterly reporting financial statements as roughly the half of the sample consists of the firms that aren't committed in providing quarterly reporting. Finally, because the starting point for the adoption of quarterly reporting depends on firms' financial year-end, identification of the correct financial year-end is essential for the analyses (Kajuter et al, 2018). Thus, focusing on annual earnings ensures greater comparability with previous studies.…”