Dilemma of Mandatory Reporting

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With the obligation to release financial information quarterly, it is believed that companies are more likely to be regularly review their financial information and internal controls.

3.3. Align with Global Standards

The requirement will help to align SGX with those other jurisdictions such as US financial market which also require quarterly reporting.

3.4 Protects the Minority Shareholders

By mandating quarterly reporting, it also help to reduce information symmetry. In this case, both minority investors and controlling shareholders will have access to the equal amount of information.

4. Optimal Situation for Singapore

From the above research findings, it seems like the arguments against mandatory quarterly reporting are stronger than the points made by the proponents. However, further evaluation should be done to determine whether the mandatory requirement should be ended.

4.1 Evaluation of Arguments

4.1.1. Short-term Management Perspective

One of the greatest concerns about mandatory quarterly reporting is short-term perspective adopted by the management to meet analysts’ expectations which is detrimental to the firm value in the long run. However, there are many other factors that may promote this perspective as well such as managerial compensation plans (bonus plan hypothesis) and debt covenants (debt covenants plans) which management may shift future earnings to current earnings. In other words, scrapping off the requirement will not fully eliminate the short-termism.

4.2 Possible Effects to Abolish Requirement

4.2.1. Market Failures

From my perspective, we do have to evaluate the possible effects of abolishing the mandatory quarterly reporting requirement. Even when there are private incentives for information production, market failures can arise from externalities, free riding, adverse selection problem, moral hazard problem and lack of unanimity. In other words, investors and other stakeholders’ information needs may not be met without the regulation.

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4.2.2. Share Price Volatility

Companies may face share price volatility if they decide to drop quarterly reporting. After the FTSE 250 coal producer, New World Resources, informed that it would stop providing quarterly reports and would update the market about company happenings timely, its share drop 22 per cent. In addition, shares in National Grid also had a fall of nearly 1 per cent. (Financial Times, 2016)

However, I believe that the share price volatility is not sustainable and may be just a transitory period of scrapping off the requirement.

4.3 Evaluation of Current Standard

4.3.1. Decision Usefulness

As brought up in the arguments against the mandatory requirement, the reliability of quarterly reports is perceived to be lower as the figures published are not reviewed by external parties. However, it may increase relevance. For instance, companies that operate in cyclical industries (commodities, oil and gas etc.) have more unpredictable earnings, by releasing information more frequently, investors are better able to manage their expectations.

4.3.2. Reduction of Information Symmetry

Mandatory quarterly reporting definitely fulfil this criteria as it increases transparency between the management and the stakeholders.

Quoting Associate Professor Mak Yuen Teen, co-director from Corporate Governance and Financial Reporting Centre (NUS), he mentioned that generally companies are less willing to release bad news and quarterly reporting helps to promote information production, be it good or poor, on a quarterly basis. (Channelnewsasia, 2016)

4.3.3. Economic Consequences

Mandatory quarterly reporting does increase the cost of a firm given that additional time and resources are needed. However, it is only of a greater concern to smaller firms. If short-termism is strongly present in the company because of the requirement, long-term firm value losses is another huge downside.

4.4. Benefits of Voluntary Reporting

Voluntary quarterly reporting allows companies and shareholders to decide for themselves whether the costs outweigh the benefits of frequent reporting. Hence, it provides companies with the flexibility and allow them to evaluate whether there is a need for more frequent reporting to manage investors’ expectations.

4.5. Recommendations

In consideration of the above findings and evaluations, I conclude that it is not wise to abolish the requirement completely especially that it had been in place for more than a decade. However, SGX should definitely refine the requirement and evaluate along the way depending on the market responses.

4.5.1. Recommendations for SGX

Below are my recommendations which SGX may adopt:

(1) A higher threshold should be set. SGX can consider setting it at $300million which the general market recognizes it as “Mid Cap” status. This can help to lessen the administrative burdens of smaller companies and improve the overall quality of mandatory quarterly reports as these companies have more resources to release quality reports.

(2) The capitalization is currently based on the single-day test (of 31 December). SGX can consider changing it to weighted average share price over a longer period of time such as 90 days, which would be a more stable test of company’s capitalization.

4.5.2. Recommendations for Companies

In addition, companies should consider the following to make quarterly reporting more meaningful if their resources allow:

(1) Frequent engagement with investors that allow in-depth discussion. This can be done through webinars or online platforms that allow the stakeholders to provide feedbacks, and at the same time, get timely updates and information about the company.

(2) Non-financial measures such as environmental,