For several years I have argued, based on comprehensive statistical evidence, that corporate financial reports―quarterly and annual statements―have lost most of their relevance and usefulness to investors. Corporate earnings, in particular, are no longer a reliable measure of enterprise value change, nor are they indicators of future performance and growth. In fact, as I have shown on this blog (“The Unbearable Lightness of Earnings,” April 15, 2018), even if you could predict all the public companies that will meet or beat analysts’ consensus estimates next quarter you will barely cover your transaction costs.
Some, though by no means all, of those exposed to my message, still find it unbelievable. “There is still lost of valuable information in financial reports,” is a comment I often hear, though without much evidential support. An article of faith, so to speak.
So how surprised I was to read a recent study by Tim Loughran and Bill McDonald, both respected finance researchers who developed a widely-used software system for textual analysis. Loughran and McDonald documented the number of downloads of annual financial reports (10-Ks) from the SEC EDGAR (Electronic Data Gathering and Retrieval) server log.* EDGAR is the go to place for corporate financial reports. All public companies have to file their SEC reports through EDGAR, and the SEC makes these filings immediately public. So, if you are an analyst, investor, or a researcher, you go to EDGAR for your information.
So, take a guess: how many 10-K (annual report) downloads gets the average public company? Thousands? Tens of thousands? Not quite. Would you believe 28? Here are Loughran and McDonald (p. 3):
“The punchline of our paper is the surprisingly low number of investors who access the annual reports of publicly-traded companies at the time of their initial filing. The average publicly-traded firm has its annual report requested from the EDGAR site only 28.4 total times by investors on the day of the filing and the following day [28.9 times in five days]. On its filing date, the median publicly-traded firm has only nine 10-K requests.”
28? 9? There are many more people working at the FASB―the accounting regulator―than financial report readers.
Loughran and McDonald mention GE (General Electric) with 40% of its shareholders being retail investors, and with a large pool of retired employees who presumably are interested in the company’s finances. Yet, in June 2, 2015, the Wall Street Journal quoted GE’s CFO noting that its 2013 annual report was downloaded only 800 times from GE’s website during the entire year.