Information Timing and Launch: The Gaming of Guidance!

    I’m a lapsed tutorial, insofar as I’ve not submitted a paper for publication in additional than 20 years, however to accumulate tutorial standing, I did should earn a PhD within the distant previous. My doctoral dissertation, which like most doctoral theses is little famous and lengthy forgotten, was accomplished in 1984 and targeted on how the frequency of and delays within the launch of data performs out in inventory value volatility, skew and jumps. I do not play to rehash that paper, however there have been two lengthy operating information tales that jogged my memory of it. The first is a proposal being floated by the Securities Exchange Commission (SEC) to switch quarterly reporting of monetary statements by firms with semi-annual reporting. The second is the opinion voiced by Kevin Warsh, the brand new Fed Chair, that the Fed ought to present much less steerage to monetary markets on future selections.

    The two tales could seem unconnected, however they’ve two frequent options. First, each actions (eradicating quarterly reporting necessities and decreasing/eliminating Fed steerage), if carried by, will take away “news” that markets have change into used to receiving and utilizing to calibrate costs.  Second, the arguments for and towards every of those proposals have parallels. The advocates for eradicating quarterly experiences argue that they feed into market myopia and enhance short-termism in markets, and the supporters of much less Fed steerage imagine that this steerage creates gaming amongst merchants and buyers, growing deal with the FOMC actions on the expense of fundamentals. The pushback towards each proposals comes from those that imagine that withholding quarterly experiences and Fed steerage removes data that markets use to set costs, making these costs extra unstable and fewer informative. As is nearly all the time the case with these debates, there may be each fact and hyperbole on either side, and I’ll attempt to thread the needle.

    Most buyers and merchants in fairness markets, and particularly so within the United States, have spent their investing lifetimes in an atmosphere the place firms not solely launch full monetary statements each quarter, however accomplish that with fan fare. As we are going to be aware on this part, that has not all the time been the case, even within the US, and has newer origins, with setbacks, in lots of international markets. 

The History of Earnings Reporting Periodicity

   The Securities Exchange Act of 1934, which created the SEC, arrange foundational annual reporting necessities (10-Ks) for publicly traded firms, modified in 1955 to require semi-annual reporting and in 1970, quarterly experiences, inside 45 days from the top of every quarter. That mentioned, there have been forces which have induced corporations to report earnings on a extra frequent foundation to buyers properly earlier than these regulatory necessities had been put in place. The first had been the inventory exchanges that imposed their very own constraints, with the NYSE requiring most corporations to report on a quarterly foundation as early as 1939. The second was the popularity by corporations that monetary transparency (within the type of extra frequent and extra detailed monetary experiences) may make them extra engaging to buyers. As a consequence, it’s estimated that in 1931, previous to both the SEC or NYSE mandating disclosure, greater than 60% of publicly traded firms had been already disclosing data on a quarterly foundation.

    The shift to extra frequent reporting was slower in the remainder of the world and has seen extra reversals. Europe, for a lot of the final century, has a patchwork of guidelines, with some international locations adopting stricter disclosure legal guidelines than others. The UK imposed necessary quarterly earnings reporting in 2007, however allowed a shift again to semi-annual reporting in 2014, and the EU additionally adopted an analogous timeline, introducing quarterly experiences in 2007 and withdrawing that requirement in 2013. In 2003, Singapore began requiring quarterly reporting for corporations with market capitalization exceeding S$20 million, however in 2020, shifted away to requiring it just for a subset of corporations with monetary and regulatory issues. Japan began its quarterly reporting necessities in 2003 as properly, but it surely too reversed that requirement in 2024.  In rising markets, there are giant variations throughout international locations. In India, publicly traded firms are required to report their financials on a quarterly foundation, and the identical is true for a lot of Brazilian and Chinese firms. In Africa, Nigeria requires quarterly reporting however South Africa  has a semi-annual reporting mandate, although many firms voluntarily launch quarterly financials; a lot of the remainder of Africa has semi-annual reporting necessities. 

    In sum, the assumption firstly of the twenty first century that the remainder of the world would observe the US mannequin of mandated quarterly reporting for publicly traded firms has not come to fruition, as many elements of the world have experimented with necessary quarterly reporting, earlier than abandoning it in favor of semi-annual reporting, for quite a lot of causes. That mentioned, it’s value noting {that a} important proportion of corporations voluntarily report their monetary outcomes on a quarterly foundation, even when not mandated, albeit with completely different levels of depth.

The Content of Earnings Reports

    The debate about how regularly firms ought to report their financials misses a key element associated to what their monetary experiences embrace as content material. Focusing on the US, as an illustration, the magnitude of quarterly earnings experiences has elevated over time, increasing from naked bones monetary statements fin the Nineteen Seventies to a lot bigger paperwork that go properly past monetary statements right this moment. In 1980, as an illustration, a typical quarterly earnings report contained 2000-5000 phrases, however by the flip of this century, these experiences had tripled or quadrupled in measurement, and the developments proceed. The graph under, as an illustration, seems to be on the progress in phrase rely for the median quarterly and annual experiences within the Russell 3000 firms between 2006 and 2020 (for quarterly) and 1994 to 2020 (for annual):

As you may see the variety of phrases in each quarterly and annual experiences has elevated over time, and the bulking up of earnings experiences could be defined by a number of components:

1. Accounting rule adjustments: Accounting rule writers have been busy including extra objects to the record of required disclosures for public firms in the previous few a long time. Some of this elevated disclosure (stock-based compensation, for instance) displays a altering enterprise world and is merited, some is in response to a company scandal and if usually knee-jerk and a few, in my cynical vie, displays accounting attempting to be related to markets once more.
2. Macro occasions: In years of market crises, financial or political, you will note disclosures enhance. In the graphs above, discover the spikes in 2008/2009 and 2020, the primary in response to the 2008 banking disaster and the latter to COVID.  Superimposing the consequences of globalization, the place an organization finds itself uncovered to issues in each nook of the world, it has added to the disclosure bloat.
3. Legal Protection: One of the culprits chargeable for disclosures bulk is the danger publicity part, the place firms are required lay out an exhaustive (and exhausting) record of issues that may go flawed of their enterprise fashions. I’ve by no means discovered a threat disclosure helpful in a valuation, because it appears to be written by legal professionals with the target of offering authorized cowl.
4. Guidance: In the Eighties, quarterly earnings experiences had been targeted on reporting on operations throughout the quarter in query and administration was not anticipated to, and didn’t present, steerage about future quarters. That began to alter within the Nineties, particularly with the passage of the 1995 Safe Harbor Law and Reg FD (which prevented firms from selectively leaking data to analysts), and surged by the second half of the last decade, peaking in 2003, when greater than 50% of all firms offering earnings steerage. Thankfully, the method has receded, with solely a fifth of all corporations now offering steerage with earnings experiences, however it’s simple that there’s rather more forward-looking parts to earnings experiences than was once the case.

The bulking up of earnings experiences is a part of a phenomena that I time period “disclosure diarrhea” and argue has undercut the usefulness of those experiences, with extra disclosure perversely making for much less data.

    To make sense of the arguments for and towards quarterly earnings reporting, it’s a must to get a measure of what occurs main into and out of those experiences, within the “earnings game”. The course of begins with analysts and buyers making forecasts of what the earnings report will include, virtually all the time together with estimates of the earnings per share, however usually additionally containing estimates of anticipated revenues and even working metrics (like margins) for top profile firms. The analyst forecasts, at the least from promote facet analysts, change into quasi public data and are sometimes aggregated and reported as consensus estimates by monetary information companies. Zacks, as an illustration, is without doubt one of the companies that has been doing this for many years, however that data is now extensively accessible on Google and Yahoo! Finance (with the estimates for Apple on July 27, 2026, for the September 2026 earnings report, proven under):

Yahoo! Finance for Apple earnings forecasts

These analyst forecasts, as soon as made, are revisited, partly in response to company-specific information tales and partly to macroeconomic developments, and revised forecasts are supplied, with companies once more monitoring these revisions for developments (as you may see under for Apple, from Zack’s):

Zack’s Apple earnings revisions

As the earnings launch date approaches, analysts proceed to revise their estimates, and on the date of the announcement, the precise earnings per share is in comparison with the anticipated quantity, with greater (decrease) than anticipated earnings labeled as optimistic (detrimental) surprises. The market value response is usually constant, with optimistic (detrimental) earnings surprises translating into will increase (decreases) in inventory value. The graph under, whereas dated, seems to be at inventory value responses to earnings stunned categorized into ten deciles (from most optimistic to most detrimental):

There is a few proof that the market responses to earnings experiences have change into extra muted over time, maybe due to public entry to analyst forecasts and revisions. The hyperlink between earnings surprises and inventory value adjustments has change into the explanation why analysts spend as a lot time as they do, forecasting earnings per share within the subsequent quarterly report, and why merchants specializing in the identical metric. There is one other facet of the market response to earnings surprises that turns into grist for the buying and selling mill, and it comes from the value drifts within the days after earnings are launched, with optimistic (detrimental) surprises adopted by upward (downward) drifts. While the value drift is small, it might nonetheless be giant sufficient to make a distinction in energetic buying and selling, the place profitable by inches remains to be profitable.

    As with virtually all the things else that’s market-related, there are not any simple wins on this recreation, and as an increasing number of folks play the earnings forecasting recreation, new wrinkles have emerged. First, firms have discovered to make use of the flexibleness embedded in accounting guidelines to seek out methods to beat analyst estimates, with tech firms, specifically, standing out. That earnings gaming performs out as a disproportionately giant variety of optimistic earnings surprises (at the least among the many S&P 500 firms, damaged down by sector), as is obvious from earnings surprises on the  S&P 500 firms within the second quarter of 2026:

Second, as firms routinely beat analyst estimates, markets readjust, creating the phenomenon of whispered earnings, the place buyers construct within the expectation that an organization that has traditionally delivered earnings which are 5% or 10% above estimates will proceed to take action, and a lesser quantity is a detrimental shock. In the graph under, I have a look at the market value response to earnings surprises within the second quarter of 2026:

As you may see, the linkage between earnings surprises and value response is weak, with a big subset of optimistic surprises leading to value drops. 

    Much of the controversy about whether or not the US ought to shift away from quarterly to semi-annual experiences could be boiled all the way down to what you concentrate on the time and power buyers and corporations spend taking part in the earnings recreation, and the place that point and power shall be spent within the absence of quarterly experiences. Those who’re advocates for much less frequent reporting are of the view that the earnings recreation, targeted as it’s on subsequent quarter’s earnings estimates and whether or not the corporate can beat them, contributes to short-termism and distracts from fundamentals. Those who’re pushing for preserving the established order (of quarterly reporting) imagine that eradicating quarterly experiences will simply shift the sport, maybe extra intensively, into the semi-annual experiences and that there’s worth to long run buyers from having quarterly experiences, gaming however. 

    There is one other subject that comes up within the context of quarterly reporting, and what would occur if these experiences didn’t exist. Legal strictures however, insiders (from inside and outdoors the agency) commerce and earn cash on materials data that they’ve entry to, however the public doesn’t. Removing quarterly reporting will create extra of a gap for insiders to earn cash on the expense of public market buyers, and whereas inside buying and selling could contribute to creating costs extra informative, it additionally provides to the sense that monetary markets are an unfair recreation.

    I’m an investor, and I  assume that there’s a compromise answer that attracts on either side of this argument. I like quarterly reporting for 2 causes. 

1. There is data in these experiences that enables me to replace my firm valuations, although for a lot of firms, the marginal influence of a quarterly report on worth is small.
2. While I’ve no real interest in taking part in the earnings recreation, the value corrections that occur round earnings experiences serve two functions. For firms that I’ve a place in, they will function as catalysts, bringing down (up) the inventory value of over valued (below valued) firms. At the identical time, virtually all the data that I discover helpful in an earnings experiences is within the monetary statements and footnotes, not within the prolonged discussions of threat publicity or within the administration steerage, and I’d welcome an elimination of those sections and a slimming down of those experiences.

Note that none of my arguments for preserving quarterly reporting are about short-termism, and that’s intentional. First, I’m not certain what short-termism even means, for the reason that cynical reply appears to be that any market motion away out of your most popular value course is brief time period, and any motion in your favor is indicative of market knowledge. Second, I imagine that almost all market contributors, and that is true throughout time and markets, commerce to earn cash within the close to time period, and that there’s nothing that regulators or rule writers can do to change this dynamic. In reality, the magic of markets is that hundreds of thousands of trades motivated by opportunism and the quick time period can nonetheless yield a value that’s long run and rational. Finally, it stays true that if we had been all long-term buyers who traded solely when the basics drove us to take action, markets could be much less liquid and transactions prices would enhance; quick time period merchants present a market service and provide liquidity that all of us (together with long run buyers) profit from.

    I hope that the SEC preserves the present quarterly reporting requirement, whereas scaling again the amount of disclosure, but when it decides in any other case, it won’t materially change a lot of what I do. I’ll miss the quarterly updates extra with youthful, higher-growth corporations, the place the working metrics (revenues, margins and so on.) can change rapidly over quick intervals, however it’s my guess that many of those corporations will voluntarily proceed the quarterly reporting custom. 

    For most buyers who began investing after 2008, the Fed, specifically, and central banks, generally, have loomed giant within the investing course of. Many buyers attribute the low rates of interest after 2008 virtually solely to Fed actions, and by extension, blame the Fed for the upper charges since 2022. I’ve lengthy argued that not solely is that this notion incorrect, however that it’s unhealthy for buyers to view the Fed as both savior or villain. 

A Short (and Personal) History of the Fed

    I began in fairness markets within the Eighties, when Paul Volcker because the chair of the Fed performed a central position in getting inflation again into test. I may need been ignorant, however I didn’t know the names of any of the members of the Federal Open Market Committee and had no concept after they met. Changes within the fed funds charge, the one charge successfully managed by the FOMC, would percolate their means into markets, however I do not bear in mind them being central to fairness market actions. 

    Volcker was adopted by Alan Greenspan, and whereas he acquired rockstar standing (at the least  amongst buyers) within the late Nineties, his views on charges had been outmoded by his views on fairness buyers (and their irrational exuberance). The FOMC met eight instances per 12 months throughout that interval, and you’ll entry the assembly minutes and actions on the Fed web site right here, but it surely stayed away from express steerage about future charge adjustments, selecting to ship refined hints as a substitute. 

    The sea change in Fed conduct and centrality occurred with the 2008 market disaster, when the Fed first launched express steerage noting that charges would keep low “for some time”, and it has largely continued that observe by the stewardships of Bernanke (2006-2014), Yellen (2014-2020) and Powell (2020-2026). Along the way in which, its place in markets has modified, as each bond and fairness buyers have change into targeted on the Fed because the arbiter of rates of interest and director of the financial system. 

The Fed’s Powers (and Powerlessness)

    To perceive the extent and limits of the Fed’s capability to information charges and the financial system, it’s helpful to start with an understanding of what it does. Through its twelve districts that span the United States, the Fed collects data on virtually each facet of the financial system, from value pressures constructing on shoppers and producers to the tempo of financial progress. While there are different authorities businesses that additionally observe these statistics, it’s simple that the Fed has a giant image view and entry to extra knowledge than another authorities company. The Federal Open Market Committee, composed of all the members of the board of governors and representatives of the district presidents, units Fed coverage on open market operations (the place the Fed buys and sells US authorities securities), the scale of the Fed’s stability sheet and the Fed Funds charge (an in a single day charge at which banks can borrow and lend their reserves). In addition to the FOMC offering coverage course on inflation and the financial system, the Fed chair testifies to Congress each six months, dealing with and answering questions from legislators.

    As the important thing rate of interest set by the Fed, the Fed Funds charge usually acquires an outsized position and there are good causes to concentrate to it. First, it operates as a sign of what the Fed is seeing within the knowledge it has collected on the financial system, with a rise (lower) in charges indicating that it sees greater (decrease) inflation and an overheated (slowing) financial system. Second, there are rates of interest which are immediately tied to the Fed Funds charge, the place adjustments percolate all the way down to companies and prospects; the prime charge and a few bank card and CD charges transfer with the Fed Funds charge. That mentioned, I imagine that Fed’s capability to have an effect on rates of interest is much extra restricted than most imagine, for 2 causes. First, whereas there may be optimistic correlation between Fed Funds charges and short-term market-set charges (just like the US treasury invoice charge), there may be as a lot proof (if no more) that the latter lead the previous, moderately than the opposite means round. Put merely, Fed funds charges are typically elevated (minimize) after quick time period treasury charges have gone up (down), suggesting that the Fed is mimicking the market. Second, the connection between Fed Funds charges and long-term market-set charges, which drive asset valuation and have an effect on debtors extra, is even weaker. To again these contentions, I chart the efficient fund funds charge, the three-month US treasury invoice charge and the 10-year treasury be aware charge on a month-to-month foundation from January 1962 to June 2026:

At the underside of the graph, I’ve a desk the place I have a look at the info on a quarterly foundation, and break it down into three teams – quarters the place the fed funds charge decreased, quarters the place it elevated and quarters the place it stayed unchanged. With each fed funds charge will increase and reduces, you may see that the hyperlink with quick time period charges is stronger, and with each quick time period and long run charges, the majority of the change in charges occurs previous to or within the quarter that the Fed Funds charge modified, however there may be solely a light spill over into the quarter after, with three month charges, and virtually no spillover, with long run charges. Put merely, baed on this historical past, it seems to be like adjustments in fed funds charge are much less alerts of future actions in rates of interest and extra reflectors of adjustments which have already occurred.

    The Fed’s weaknesses in setting rates of interest additionally performs out in its capability to change the trajectory of the true financial system. While there are clearly intervals that you could level to the place Fed actions have had a cloth influence on he financial system, with the Fed Fund charge was hiked to twenty% below Paul Volcker in 1981, and triggering a deep recession, being a major instance, the hyperlink between Fed Fund charges and financial progress stays tenuous. In the graph under, I have a look at the adjustments in Fed Funds charges and actual GDP progress within the quarter main into, the quarter of and the quarter after the change:

Again, there may be little backing for standard knowledge, which is that fed tightening (by elevating the Fed funds charge) results in drops in actual progress (and even recessions) and that fed loosening (by decreasing the Fed funds charge) is a sign of upper financial progress sooner or later. In reality, the extra normal conclusion that one can draw from the info is that the fed impact on the true financial system has been extra “meh” than “wow”.

    The hole between investor notion on what the Fed can management on rates of interest and the financial system and its precise powers is not only broad, however probably harmful. From a coverage perspective, it might result in perverse actions, the place central banks are pressured to decrease the charges they management (just like the Fed Funds charge) within the face of excessive inflation, resulting in even greater inflation sooner or later. From an investor and enterprise perspective, the deal with what the Fed is doing or will do can take consideration away from the basics, particularly inflation, that in the end drive each rates of interest and progress.

As you may see, a lot of the variation in long run rates of interest (with the ten-year US treasury charge standing in as proxy) could be defined by actions in inflation and actual financial progress over time, not Fed motion or inaction.

    All Fed chairs have needed to wrestle with the issue of being perceived as omnipotent, when their true powers are restricted, however Kevin Warsh is maybe extra uncovered than any of his predecessors. The market fixation with the Fed is now deeply embedded in market, and there are politicians on either side of the aisle who appear to assume that Warsh can convey charges (mortgage, treasury) all the way down to 2% or decrease, if he so wishes, when the reality is that with inflation expectations operating at 2.5-3%, there isn’t a probability of that taking place. 

    The pathway out of this downside shall be lengthy and there shall be pushback, however the finish recreation ought to be a world the place you see and listen to from the Fed much less, no more. I do imagine that the choice to cut back or withhold steerage is an efficient first step, and it must be adopted by extra open humility from the Fed (and from Warsh) concerning the limits of its powers and honesty about how regularly it follows markets, moderately than leads them. In the context of right this moment’s (July 29, 2026) choice by the FOMC to go away charges unchanged, as an illustration, the subtext is that whereas inflation is operating hotter than desired (3% or extra, versus the focused variety of 2%), a lot of that inflation is being pushed by a conflict and its impact on oil costs

    There shall be some who really feel that markets shall be misplaced with out Fed steerage, however I do not assume so. After all, monetary markets set rates of interest and inventory costs earlier than the steerage period, and did a reasonably good job. In reality, I feel that the surge in steerage from the Fed has led many in markets to abdicate their duty for paying heed to fundamentals and gauging what rates of interest ought to be. 

    If there’s a takeaway from this publish, it ought to be that there’s nothing inherently good about having extra disclosure. In reality, there’s a tipping level, the place data overload may cause buyers to behave in perverse methods. Thus, I’m much less of an absolutist concerning the quarterly versus semi-annual reporting debate than some, although my view is that moderately than scale back the frequency of reporting, the SEC ought to be taking a look at slimming down experiences, by changing one-size-fits-all disclosure necessities with focused disclosures and holding the deal with reporting what has occurred moderately than prognosticate concerning the future. 

    With the Federal Reserve too, I feel much less is extra is a greater technique – much less steerage from the Fed about what it would do sooner or later, much less opining from FOMC members about rates of interest and the financial system and fewer consideration to FOMC conferences and the smoke alerts that emerge from these conferences. Markets will step in to fill the vacuum, and that’s good not only for buyers however for the Fed, since its selections are knowledgeable by these market judgments.