IR Papers: When to announce earnings

Jan 31, 2014
<p>A roundup of academic research from the world of IR studies</p>

When considering the timing of a bad news earnings release, intuition suggests a day when many other companies are also announcing earnings in the hopes the safety of numbers will mute market reaction. But recent research reveals the distraction effect of competing releases is more complex.

‘Competing earnings announcements are not all equally distracting,’ explains Jim Frederickson, professor of accounting at Melbourne Business School.

Sampling quarterly earnings announcements from 1985 to 2006 for firms in the Institutional Brokers’ Estimate System database, Frederickson and colleague Leon Zolotoy, assistant professor of finance at Melbourne Business School, find a strong link between company visibility and how investors process data. Specifically, investors behave as if they queue information based on company visibility (as proxied by media, advertising and analyst coverage) and devote more attention to those firms higher in the queue.

Their research shows the number of same-day announcing firms that are more visible than your firm significantly reduces the market’s price and volume reaction to your firm’s earnings surprise during a two-day announcement window, and magnifies its post-earnings announcement drift. By contrast, the number of firms that are less visible than yours has no effect on immediate market reaction or post-announcement drift.

‘If you have bad news, pick a day where you know lots of high-visibility firms will announce,’ says Frederickson. ‘If you have good news to deliver, you don’t want to announce it on a day when you aren’t one of the more visible companies. You have to know which companies are announcing on which days, and how you stack up in terms of relative visibility.’

New in buzzwords

Sustainability is in; social and environment are out. Analyzing 13 years of online CSR/sustainability report titles from top European firms, researchers at University of Lugano say companies are using social and environment-related terms less often than in the past.

‘CSR is a diffuse, umbrella concept with a variety of meanings,’ explains study co-author Peter Seele, assistant professor for CSR and business ethics at University of Lugano. ‘Our evidence shows today’s companies have firmly embraced ‘sustainability’ as the concept that best reflects their approach to ethical business.’

In 2002, the study notes, only 22 percent of report titles used terminology related to sustainability; by 2010, 63 percent were doing so. Words in the ‘social’ category were used in half of 2002’s titles, but in only 19 percent by 2010. The frequency of environment-related words fell from 62 percent in 2001 to just 7 percent in 2010.

Seele believes the financial crisis of 2008 led companies to firmly swing toward the sustainability concept. He suggests firms find ‘sustainability’ better integrates their complex risks while distancing themselves them from specific responsibilities and legal liabilities. ‘Sustainability is a great term that allows for a neutral and business-friendly way of approaching these kinds of issues,’ he says.

World o’ research

  • A University of Arkansas survey of US-listed Asian companies documents that those from collectivist countries – such as Japan or China – provide less voluntary disclosure of intangible information than those based in more individualistic cultures, such as the countries of Scandinavia.
  • More transparent bank holding companies are better managed and have better financial performance, according to a study published in the International Review of Financial Analysis.
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