Market watchers have long griped about companies that try to bury their bad news by releasing it late on a Friday afternoon. Earnings shortfalls, product recalls, outlandish severance deals—these things always seem to hit the wires just as we’re kicking off our pumps and wingtips for the weekend. The website Footnoted even runs a regular feature called the Friday Night Dump, in which it combs through end-of-the-week SEC filings for dirty laundry.
But does this old PR trick even work in a world of 24/7 news services and social media? Not when it comes to earnings announcements, according to a working paper by Stanford Graduate School of Business accounting professor Ed deHaan and colleagues. In fact, by one measure, Friday filings might even get a little extra scrutiny—presumably the opposite of what those companies were hoping for.
That’s just one of the insights that deHaan, along with Terry Shevlin of the UC Irvine Merage School of Business and Jake Thornock of the University of Washington Foster School of Business, came up with in a study of corporate earnings announcements. The questions they explore are ones that scholars have long debated: Do companies manipulate the timing of their quarterly reports for strategic reasons? And are there times when stock traders, analysts, and journalists are less attentive?
For answers, the researchers compiled a data set of more than 120,000 quarterly earnings announcements from 2000 through 2011, with precise date and time stamps. The data set is both larger and likely more accurate than what’s been available before, deHaan says—which may account for some contradictory results in older studies.
But the real advance is in how the team gauges market attention levels. In the past, researchers have tried to get at this indirectly, by measuring how fast stock prices change when new information comes out. Instead, deHaan and his colleagues look at the actual behavior of market players following an announcement: the number of related articles published, downloads of 8-K filings, Google searches, and the time it took for analysts to update their forecasts.
Measures of Market Attention
Using these new metrics, the authors find that markets really do get distracted sometimes. Not on Fridays, no, but after hours and on busy days when lots of companies are filing at once. They also find that companies change the timing of their quarterly announcements often enough—for innocent reasons—that a devious maneuver won’t call attention to itself. “That frequency of benign changes is the camouflage necessary for strategic changes,” deHaan says. “It means there’s a big enough pool to hide in.”
So it’s not too surprising, then, that companies appear to do just that. The data shows that earnings reported after hours and on busy days—as well as on Fridays, interestingly—are significantly worse (relative to consensus forecasts) than at other times. “Obviously we can’t know what a firm’s intention was in any specific case,” deHaan says, but in aggregate, “it seems that managers do try to hide bad news by announcing it in periods of low attention.”
And it works the other way, too. “Our results also indicate that firms that beat expectations are trying to highlight their good news by moving to days when there’s higher attention,” deHaan says. “It’s two sides of the same coin.”
Skeptics have questioned what companies would have to gain from these strategies. After all, they point out, if stock markets are predictably slow to assimilate new information, a smart trader could anticipate the lag and arbitrage the difference away. And even if prices do adjust more gradually at times—an observed phenomenon, actually, known as "price drift"—any benefit in higher valuation is surely temporary. In the long run, it’s a wash.
DeHaan readily admits all this; indeed, he says, that’s one of the problems with studies that focus on price response as a proxy for attention. “The fact is, managers care about a lot of other things, too,” like their own public image and the reputation of the firm vis-à-vis business partners or skilled labor markets. For this stuff, media reports have intrinsic value (positive or negative), quite apart from their influence on the stock market—especially now that news articles live forever on the internet. “With bad news, even if you get a complete and instantaneous price response after hours, if there’s less media coverage, that’s still a plus.”
DeHaan also speculates that managers may use timing strategies to minimize stock volatility. “With the speed of information dissemination now, people are flash-trading on the headlines,” he says. “It takes time to read the press release, read the financials, and understand what the news really is; meanwhile, the stock is bouncing all over the place.” So if it’s possible to catch the market at a time when its metabolism is a little slower, smart companies will try to do so.
That may be why very few earnings announcements are made during trading hours—just two percent in 2011, down from 22 percent in 2000. (Most happen shortly before markets open or right after the closing bell.) The authors point to a telling incident in 2012: On October 8th, while Google was preparing to release a disappointing quarterly report after hours, the company’s financial printer mistakenly filed it in the middle of the day. The stock lost $22 billion in market value in mere minutes before trading was halted. Later, a fund manager said the fundamentals weren’t really that bad, but “in the middle of a trading day, people kind of shoot first and ask questions later.” (How wrong were those frantic sellers? Two years later, Google shares are up 65 percent.)
Finally, deHaan notes that whether or not a company gains the benefits it hopes for by strategically timing its disclosures, it usually has little to lose by trying. “It’s not very costly to move your announcements,” he says, “so even if you think that only maybe it’s going to work, you still do it.”
Just don’t try it on Friday. It turns out that merely scheduling an earnings announcement for that day will knock points off your stock, before you even release the information. And as the weekend beckons, you won’t make any friends among weary financial journalists either.