Is there a good way to bury bad news?

A director has resigned and you’re concerned about the market’s reaction. Do you release the news ASAP or wait until the end of the day and bundle it along with other more pleasant developments?

If you choose the latter, hoping to mitigate investor reaction by delaying or obfuscating negative news, you’ll be wasting your time. Researchers, analyzing all non-earnings 8K filings over the last 25 years, report that while managers clearly demonstrate ‘strategic disclosure behavior’, there is no evidence that their efforts bear fruit in terms of investor inattention or under-reaction.

‘Management engages in opportunistic disclosure, but this strategy doesn’t work,’ says study co-author Dan Segal, associate professor of accounting at the Interdisciplinary Center Herzliya. ‘Our findings are consistent with an efficient market.’

So if it doesn’t work, why do managers do it? Segal believes manager behavior may be related to never getting feedback on an alternative reporting approach. ‘It’s the road not taken,’ he posits. ‘You’ll never know if the road you didn’t take is the shorter one.’

Minding the GAAP

European corporate managers, seeking more flexible ways to convey information about earnings persistence, often turn to non-GAAP disclosures. Research suggests these earnings measures, calculated by excluding transitory components from GAAP earnings, tend to be accompanied by enthusiastic use of communication techniques to accentuate non-GAAP earnings metrics and disguise the persistence of the excluded items.

These techniques include disclosure language tone, emphasis (placement, repetition) and the selection of performance comparisons and favorable income statement figures. But how thickly can you lay on the hype before investors and analysts see through it?

Not that much, as it turns out. Empirical tests measuring non-GAAP earnings and impression management techniques on a sample of large European company earnings press releases from 2003 to 2007 suggest market participants are quite capable of detecting managers’ self-serving ‘cheap talk’.

They will even punish managers who combine too many techniques in an attempt to positively bias investor perception about the persistence of non-GAAP earnings. ‘Investors, even non-sophisticated ones, expect companies to put a positive spin on events,’ explains study co-author Encarna Guillamon-Saorin, assistant professor of accounting at the Universidad Carlos III de Madrid. ‘But if you push it too much, especially in combination with non-GAAP disclosures, they react negatively.’

In a related study, Guillamon-Saorin and colleagues at the Universidad Autónoma de Madrid and the University of Bristol examined online press release headlines announcing the annual results of various major Spanish companies. ‘Headlines are a key ‘framing’ device that sets the tone for the rest of the press release,’ notes Guillamon-Saorin. ‘These first impressions, once formed, anchor the reader and become difficult to modify, even when the information is discovered to be [potentially misleading].’