It is incredibly ironic that the University of Chicago confirmed economists don’t understand either transparency or its role in the global financial system.

How did the home of the Efficient Market Hypothesis do this?  It surveyed a carefully selected panel of economists for their opinion about public company quarterly earnings releases.  The panel was asked for how strongly they agreed or disagreed with two statements.

The first statement:

Letting publicly traded European firms report earnings annually rather than quarterly would lead their executives to place more weight on long-term issues in their investments and other decisions.

This is a statement only a card carrying member of the Opacity Protection Team would agree with.

Why?

It assumes disclosing to investors is bad.

In the case of this specific statement, quarterly disclosure is bad because apparently investors use it to prevent management of the companies they invest in spending money or making decisions to ensure the long run success of these companies*.  It doesn’t make any sense investors would act this way.  After all, investors invest because they want the company to be successful in the long run.

So how did the select group of Economists respond to this statement?

• Strongly Agree                   2%
• Agree                                  32%
• Uncertain                           26%
• Disagree                               6%
• Strongly Disagree               8%
• No opinion                           6%

86% of these Economists showed they don’t understand why quarterly disclosure might be necessary so investors could know what they own.  86% of these Economists showed they don’t understand quarterly disclosure is necessary for the market to reward good long-term decision making.  Otherwise stock prices simply reflect management’s and Wall Street’s story telling prowess.  86% of these Economists showed they don’t understand disclosure is necessary for market discipline when management doesn’t invest for the long term (market discipline occurs when investors decide to sell because they don’t like what management is doing).

On the bright side, 14% of these Economists understood at some level the statement was wrong.

The second statement:

A switch from quarterly to annual earnings reports would, on net, benefit shareholders of European firms.

Another statement only a card carrying member of the Opacity Protection Team would love.

Why?

It assumes disclosing to investors is bad.

In the case of this specific statement, providing less disclosure benefits investors.

So how did the select group of Economists respond to this statement?

• Strongly Agree                   0%
• Agree                                  16%
• Uncertain                           34%
• Disagree                              18%
• Strongly Disagree               6%
• No opinion                           6%

94% of these Economists just showed they don’t understand transparency (in the form of quarterly disclosure) or its role in the global financial system (if they understood, they would have strongly disagreed).

94%!

Remember, these are individuals who possess a PhD in Economics.  They would like you to think they have some expertise in how the economy works.

94% just demonstrated this isn’t true!

Apparently they don’t know transparency/disclosure is the foundation on which Economics is built.  Without information, parties to a transaction are blindly betting.  There is no reason to think markets based on blindly betting yield the same optimal allocation of resources as markets based on informed decision making.

How exactly can they expect anyone to believe their claim to know anything about how the economy works when they don’t know how the financial system supporting the economy works?  Apparently none of these Economists are familiar with the Great Depression, the Pecora Commission or Justice Brandeis.  At the start of the Great Depression, the Pecora Commission was given the mandate to look into the causes of the Great Depression.  What it found was darkness was Wall Street’s greatest ally.  It allowed the bankers to engage in bad behavior.  The antidote to darkness was disclosure as suggests by Justice Brandeis in Other People’s Money.  To implement this antidote, the FDR Administration created the SEC.

In 2008, the Queen of England asked why the Economics profession hadn’t seen the financial crisis coming.  A decade later, 94% of this select panel of Economists demonstrated the Economics profession still has no idea how the financial system works and where financial crises come from (hint: financial crises originate in the Blind Betting quadrant of the Information Matrix when the valuation story told by Wall Street is called into doubt; because investors don’t have the information they need to dismiss the doubt, they trigger the classic financial panic by running to sell and try to get their money back).

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* I am fully aware of the argument quarterly disclosure puts pressure on management to meet Wall Street’s earnings forecast and that management will take short-sighted action to do so.

But why should frequency of reporting put pressure on management to take short-sighted actions?  Is this really a bug with disclosure?  After all, if quarterly reporting puts pressure on management to take short-sighted actions, so too would annual reporting.  Why not once a decade reporting?

With even a little bit of investigation, you discover the fundamental reason management takes short-sighted actions is it receives a very high percentage of its compensation in the form of stock (options, restricted shares, ….).  What if these shares didn’t vest until five years or even a decade after management left the firm?  This would more than likely end short-sighted behavior and swing the pendulum to focusing on long-term issues.