All the Reasons Trump Would Be Wrong to Ditch Quarterly Earnings

Companies can happily invest for the long run while reporting quarterly. Just look at today’s economy.

By James Mackintosh of The WSJ. Excerpts:

"For proof, just look at today’s economy. Big Tech companies are set to invest almost $400 billion this year in long-term artificial-intelligence projects, and quarterly reporting has been no barrier. Big Oil explores and builds multibillion-dollar wells and refineries while being publicly listed. And corporate investment overall in the U.S., at 10% of GDP last year, is higher than any time before quarterly reporting was introduced in 1970."

"No need to take my word for it. The U.K. offered a perfect case study to examine quarterly reporting when it made it optional in 2014. There was no effect on investment or research spending for companies that switched to half-yearly reporting, suggesting they didn’t start to think more about the long term.

“That really undercuts one of the main arguments against quarterly reporting,” says MIT senior lecturer and former fund-management executive Robert Pozen, who, together with two colleagues, studied the U.K. change. 

Indeed, if quarterly reporting were such a huge barrier to companies, it’s odd that the U.S. market is thriving, while London is struggling to attract new listings or even hold on to existing ones."

"The problem is much wider: Chinese listed-company profit margins are below 8%, while in the U.S. they are approaching 14%. State-directed overinvestment is a significant part of the problem." 

US companies are too focused on the short term. Except when they think long term. But that’s bad, too, apparently.

By James Pethokoukis of AEI.

"Many Democrats, including Elizabeth Warren, and some Republicans, including Marco Rubio, complain that businesses aren’t investing enough because of corporate short-termism driven by shareholders looking for high returns ASAP. (Spoiler: This doesn’t actually seem to be true.) Back during the 2016 presidential race, Hillary Clinton called the phenomenon “quarterly capitalism.” If only more businesses looked to the distant horizon and invested accordingly.

So what’s a good example of long-termism, properly understood? How about retailing giant Amazon? It does a whole lot of investment, some $200 billion since 2011, including huge amounts on R&D. And a review of the US tax code suggests that Amazon is doing exactly what Washington wants American corporations to do: invest. Companies can avail themselves of a R&D tax credit as well as a temporary provision that allows them to deduct 100% of the cost of new investments. As the company puts it, “Congress designed tax laws to encourage companies to reinvest in the American economy. We have.”

Amazon’s statement was a response to this Joe Biden tweet: “I have nothing against Amazon, but no company pulling in billions of dollars of profits should pay a lower tax rate than firefighters and teachers. We need to reward work, not just wealth.” But the point of those pro-investment tax provisions is to encourage investment that leads to higher productivity and higher living standards. 

And as to the basic charge that Amazon paid no 2018 federal taxes, ace Wall Street Journal tax reporter Richard Rubin explains it this way:

A closer look at the internet giant’s tax disclosures over several years paints a more complicated picture: Amazon has paid income taxes somewhere, albeit at a low rate, likely helped by deductions and incentives related to investment, research and employee compensation…. Did Amazon really pay no taxes for 2018? We can’t know. Amazon’s tax returns are private, and its financial statements disclose costs in terms designed for shareholders, not policy makers: It includes accounting measures of taxes, which differ from tax-return calculations. … By one measure — comparing pretax U.S. profit and the company’s “current provision” for U.S. income taxes — Amazon earned $11 billion and had a tax bill of negative $129 million in 2018, essentially getting a net benefit from the tax system. … But the current provision isn’t the same as the bottom line of Amazon’s 2018 tax return. Instead, the current provision is an accounting measure of the company’s near-term tax cost. It is an estimate of the 2018 tax bill plus settlements of past disputes, changes to past projections and updates to reflect new regulations and laws. Amazon’s total effective tax rate for 2018 was 11%, including that current provision but also adding in foreign, state and deferred taxes. … What’s the right way to determine what Amazon actually pays? There’s no right way, and each year is a snapshot. Longer views can help. From 2012 through 2018, Amazon reported $25.4 billion in pretax US income and current federal tax provisions totaling $1.9 billion. That is an 8% tax rate — low, but not zero or negative. Looking back further, since 2002, Amazon has earned $27.7 billion in global pretax profits and paid $3.6 billion in global cash income taxes, a 13% tax rate.

So it’s complicated. But what’s relatively simple to understand is that Amazon, one of the most innovative companies in the world, continues to plow billions into all sorts of investment, including R&D. Its low tax rate isn’t a problem. Indeed, there is good reason to think it would be beneficial to have a much lower US corporate tax rate at about the level of Amazon’s."

In the Long Run, Fear of Short-Termism Is Mostly Bunk

Is the economy suffering from CEOs pushed by investors to focus only on the next quarter? The evidence shows it isn’t

By James Mackintosh of The WSJ. Excerpts:

"We can go beyond anecdotes. Harvard Law School professor Mark Roe points out in a forthcoming paper that there should be three effects, if short-termism really has spread from Wall Street to management. R&D should be lower, since it has costs today for uncertain benefits in the future; business investment should fall faster in the U.S. than countries less reliant on stock exchanges; and corporate cash should be lower as shareholders demand it back via buybacks and dividends.

None has happened. R&D spending by S&P 500 companies is at the highest proportion of sales since at least 1990, according to Goldman Sachs. Business R&D is the highest proportion of GDP since the government started tracking it in 1959. If short-termism is a problem, it isn’t obviously hurting overall R&D spending."

"Capital spending has dropped as a share of sales and GDP over many years—but it has dropped in Germany and Japan too, countries notable for not being sensitive to shareholder desires. The broad pattern of falling corporate capital spending is mirrored across industrialized countries"

"The surge in share buybacks is often held up as short-termism writ large. But companies by and large aren’t buying back stock with cash that could instead be invested for the future. They are borrowing to pay for the buybacks, taking advantage of low interest rates, and aren’t deprived of cash as a result."

The Imaginary Problem of Corporate Short-Termism

Short-term thinking often makes sense for U.S. businesses, the economy and long-term employment.

By Mark J. Roe, WSJ. He is a professor at Harvard Law School.

"there’s also considerable evidence that stock markets don’t discourage long-term business plans. Institutional investors haven’t penalized companies for bumping up research-and-development spending, even though the payoff may be years down the road. Think of Amazon, Apple and Google, each of which spends billions on R&D. Oil companies make multi-decade investments in oil fields without the stock market impeding them."

"Some complain that today’s corporations aren’t investing cash back into their businesses to expand capacity. But that’s just what long-term investment should produce in a weak economy with below-normal capacity utilization. Firms should wait until they anticipate using current capacity well before expanding."

"Typical American shareholders, like Fidelity Investments, Vanguard and other mutual funds, haven’t shortened their holding period for stocks."

"Moreover, investors aren’t the only and maybe not even the most important place to look for short-term pressures: Managers and boards want good results on their watch, and CEOs shorten their management horizons as they reach the end of their tenure. Proposals to free managers further from investors by giving them more autonomy could thus worsen, not help, the problem."

"It makes no sense for brick-and-mortar retailers, say, to invest long-term in new stores if their sector is likely to have no future because it will soon become a channel for Internet selling."