While delays in the reporting of corporate earnings are infrequent, they usually are associated with a significant reduction in firm value.
However, the severity of that decline can be mitigated, depending on the reason offered for the delay, according to a new study.
The study, by MIT Sloan School of Management senior lecturer Christopher Noe, examined a sample of earnings delay announcements. Noe found that the average one-day stock price decline on the day that a company announces a delay is nearly 7 percent.
“The market is reacting not to a piece of news, but to the announcement that news won’t arrive as expected,” he said. “When a company says it isn’t going to make an earnings announcement, it is usually a big deal.”
Looking at the reasons given for delays, Noe maintains that certain reasons have less of an effect on the stock price than others. For example, when companies attributed the delay to an accounting error that required additional time to fix, it resulted in an average stock price decline of 9 percent.
In contrast, when companies attributed the delay to a business-related event such as a merger, it resulted in a 4 percent average decline.
More innocuous reasons such as a delay caused by an accounting rule change or a power outage at the company didn’t cause any statistically significant declines. On the other hand, when companies failed to give any reason at all, the average reduction in stock price was 10 percent.
Dr. Noe, who also is a vice president at Charles River Associates, further found that the drop in stock price was not a short-term consequence, but rather the beginning of a longer-term trend of lower earnings. His findings are reported in the paper, “Information Content of Earnings Delay Announcements,” co-authored by Tiago Duarte-Silva of Charles River Associates, Huijing Fu of Texas Christian University, and K. Ramesh of Rice University.
“We looked at changes in earnings around delay announcements and found that average earnings were down 5 percent in each of the following two years,” he said. “So investors hear of a delay and seem to have a good general sense about what these announcements imply for future earnings and can discriminate among the given reasons for the delay.”
The lesson for companies is that the market can discern the less innocuous reasons from the more innocuous ones, the study found. “For less innocuous reasons, disclosure could potentially benefit managers by limiting any reputational or legal consequences of the delay,” said Noe. “For more innocuous reasons, managers shouldn’t necessarily feel that the reason isn’t material enough or the delay long enough to bother disclosing the reason, because no news tends to be interpreted as bad news.”
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