Dr Lee Kin Wai, associate professor in Nanyang Business School, presented his findings in an article in Singapore Accountant Jan 2007. I have summarised his conclusions as follows.
Advantages
- Stock prices do react to quarterly earnings announcement.
- He then investigated and concluded on the effect of voluntary disclosure in quarterly financial reporting. He defined "voluntary disclosure" as disclosure released by management over and above the mandatory requirement in the quarterly reporting.
- The more information presented in its voluntary disclosures, the lower its cost of equity capital and debt capital.
Disadvantages
- Investors, market and consequently the management of these companies are geared towards short term focus. For those with some experience in doing business, we are aware of the great difficulties in producing results in 3-month quarterly windows but yet investors and market will measure their performance as such.
- Management may be encouraged to "manage" ie. spread their earnings over the various quarters to generate "quarter-to-quarter growth" and "beat analysts' estimates".
- Dr Lee observed incremental costs to comply in terms of human hours to prepare and approve the accounts.
- The stronger a company's internal controls, the shorter the time to close the accounts. Case for corporate governance to be strengthened.
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