A roundup of academic research from the world of IR studies
Managers with bad earnings news to report sometimes try to ‘hide’ it by announcing at times when they hope the market isn’t paying too much attention. Intuition (and some research) suggests three specific times when investor attention may be lower than usual: after trading hours, on Fridays and on days when many other firms are reporting. Recent evidence, however, suggests one of those strategic disclosure choices won’t work as expected.
Using a novel array of proxies to measure market attention, US researchers find announcements after trading hours and on ‘busy’ days are associated with fewer news stories about the event, fewer EDGAR downloads and reduction in the speed with which analysts update forecasts. They therefore conclude that managers do, in fact, try to time the market, and that iterations of the strategy can be effective at ‘easing in’ the news.
But according to study co-author Jake Thornock, assistant professor of accounting at the University of Washington, the Friday effect is a myth. ‘None of our measures found any less market attention on Fridays,’ he says. ‘In fact, firms that release on Fridays actually tend to generate more 8K downloads.’
Thornock, who along with colleagues Ed deHaan at Stanford University and Terry Shevlin at University of California at Irvine, sampled a decade’s worth of US earnings releases, notes only 8 percent of observations occurred on a Friday. ‘To really get lost in a crowd, Thursday might be a better bet,’ he says. ‘That’s when 30 percent of firms release earnings. The market does have lulls and spikes of attention – but Friday isn’t one of the lulls.’
Class action reaction
More than one third of a company’s analysts revise earnings forecasts downwards in the days surrounding the filing of a shareholder-initiated class action lawsuit, according to US researchers. Worse, analysts display a nasty spillover effect when updating earnings for other firms in the same industry.
Sampling more than 3,000 lawsuits filed between 1996 and 2010, investigators at the University of Rhode Island and the University of Dayton discover filings against larger companies and those with a high proportion of institutional ownership tend to draw the quickest earnings revision response, while smaller companies face the biggest revisions.
Despite lower earnings expectations, the investigators find no systematic downgrading of recommendations. ‘Analyst reluctance to downgrade is perhaps no surprise,’ says study co-author Bing-Xuan Lin, associate professor of finance at the University of Rhode Island. ‘But it was somewhat surprising to see that analysts consistently look beyond a single questionable firm to the industry group as a whole.’
Lin believes that when the shadow of suspicion falls on an industry peer, prudent firms should proactively reassure the market about their own accounting practices. ‘Otherwise, you can expect a tendency for analysts to lump you together in the same rotten barrel when estimating earnings,’ he warns.
Keep your aim up
Managements that issue unrealistically low guidance easily exceeded at earnings announcements soon lose credibility, according to a New York University study.
Consequences are hardest for serial offenders, but throwing even a single ‘lowball’ can engender a market significantly less responsive to new negative news guidance and less enthusiastic when firms meet or beat prevailing consensus, according to study author Jing Chen, a doctoral candidate at the Stern School of Business.
‘Managers may want to think twice about lowballing,’ he says, noting a link between lowballing and insider trades as well as company share buybacks and issuances. ‘While there may be short-term incentives, there are also longer-term consequences.’
