The Struggle for a Common Interim Reporting Frequency Regime in Europe

Abstract

This paper analyzes the effect of the Transparency Directive (TD) on interim reporting frequency in the European Union (EU). The TD defines the minimum content of annual and interim reports. In contrast to the USA, quarterly financial reporting is currently not mandatory in the EU. However, Member States and stock market operators can enact stricter local regulations. In October 2011, the Commission published a draft to modernize the TD proposing to abolish mandatory quarterly reporting across the EU. This surprising amendment is in contrast to the Commission's original intention. This article analyzes the reporting frequency regulation in the EU and the potential effect of abolishing mandatory quarterly reporting on the reporting frequency. I find that voluntary quarterly reporting is a function of firm, industry and country characteristics and, although managers are reluctant to change reporting frequency, abolishing mandatory quarterly reporting might lead to a reduction of quarterly reporting in several countries in the long run. This could have significant effects on, for instance, the information asymmetry in these countries that regulators should consider. On a more general note, given the variety of opinions on the ‘right’ interim reporting requirements in the EU, results from academic research could probably further facilitate a more fact-based debate on the issue and further research should investigate the capital market and real business effects of reporting frequency regulation in the specific EU context.

Acknowledgements

I gratefully acknowledge the financial support of the German Federal Ministry of Education and Research (BMBF) and the Hanns-Seidel-Foundation. I also thank the European Commission and the national stock market regulatory authorities as well as the national stock market operators for their support and helpful information.

Notes

The TD also includes requirements on the notification and disclosure of major share holdings and the storage of financial information. The article focuses on the interim reporting requirements.

In the remainder of the paper, quarterly reporting refers to quarterly financial reporting including a condensed set of financial statements as regulated by International Accounting Standard (IAS) 34.

The article focuses on the EU-15 since the 12 new Member States that joined in 2004 and 2007 are still transitory economies and as such less comparable. The sample used in the study ranges from 2005 to 2010 when the new Member States were still in the process of adopting the EU Directives, the corresponding financial and disclosure regulation and the enforcement mechanisms. Moreover, several of the Member States have failed to effectively transpose and enforce the TD. This led to infringement procedures due to non-compliance launched by the European Commission (for instance against Poland and the Czech Republic). In addition, focusing on the EU-15 covers approximately 96% of the total market capitalization on all stock exchanges in Regulated Markets in the EU-27 (FESE, 2012).

In the USA, quarterly financial reporting is mandatory since 1970 (Butler et al., 2007).

The findings regarding cost of capital are controversial: While Hail (2002) and Francis et al. (2008) find that increased disclosure reduces cost of capital, Botosan and Plumlee (2002) and Heitzman et al. (2010) find conflicting results. Leuz and Wysocki (2008) argue that the relation between cost of capital and disclosure depends on the measurement technique used.

An example of an IMS can be found in Appendix 2.

Harris (1998) indicates that the argument could go both ways: Proprietary costs could be higher due to higher competition or lower due to the higher economic rents to be protected in more concentrated industries.

The number includes all observations from Austria (w/o Prime Market), Belgium, Germany (w/o Prime Standard), Denmark, France, Ireland, the Netherlands, the UK as well as the observations from Spain and Italy after the adoption of the TD.

All reported shares of voluntary adopters are based on a predicted adoption probability in excess of 50%.