Tag: Earnings announcements


Market (In)Attention and the Strategic Scheduling and Timing of Earnings Announcements

The following post comes to us from Ed deHaan of the Accounting Area at Stanford University; Terry Shevlin, Professor of Accounting at the University of California, Irvine; and Jake Thornock of the Department of Accounting at the University of Washington.

The following post comes to us from Ed deHaan of the Accounting Area at Stanford University; Terry Shevlin, Professor of Accounting at the University of California, Irvine; and Jake Thornock of the Department of Accounting at the University of Washington.

In our paper, Market (In)Attention and the Strategic Scheduling and Timing of Earnings Announcements, forthcoming in the Journal of Accounting and Economics, we revisit a long-standing but still unresolved question: do managers “hide” bad earnings news by announcing during periods of low market attention? Or, conversely: do managers “highlight” good earnings news by announcing earnings during periods of high market attention? We posit three necessary conditions for an effective hiding/highlighting strategy. First, to be able to hide bad news, managers must change their earnings announcement (“EA”) timing somewhat frequently. A deviation from a long-standing pattern of EA timing could attract attention to the very news the manager is trying to hide. Second, there must be variation in market attention that is predictable to the manager ex-ante—random variation in attention would not allow for strategic timing of bad or good news. Third, we must observe that managers do tend to announce more negative (positive) earnings news during periods of lower (higher) market attention. We also examine an additional potential strategy for reducing attention to bad news: by scheduling EAs with less advance notice or “lead-time.”

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How Foreign Firms Communicate with US Investors

The following post comes to us from Russell Lundholm, Rafael Rogo, and Jenny Li Zhang, all of the Accounting Division at the University of British Columbia.

The following post comes to us from Russell Lundholm, Rafael Rogo, and Jenny Li Zhang, all of the Accounting Division at the University of British Columbia.

Foreign companies that trade their equity in the US face serious obstacles. They must navigate a complex set of SEC disclosure requirements, while at the same time satisfying US investor expectations about the frequency and content of voluntary disclosures. Their home country may be far from the US, speak a different language, use different accounting rules, and offer different types of investor protection than the US, and each of these differences presents a friction that must be mitigated in order to attract US investors. Given these cultural, procedural, and linguistic differences, one might expect that the disclosures of foreign firms would be of lower quality than their US firm counter-parts. Nonetheless, in our paper, Restoring the Tower of Babel: How Foreign Firms Communicate with US Investors, forthcoming in The Accounting Review, we find that foreign firms traded in the US present more numerical data and write more readable text in the Management Discussion and Analysis (MD&A) section of their 10-K, and write more readable text in their earnings press releases, than comparable US firms. More importantly, we find that the readability of text and amount of numerical data in both the MD&A and earnings press releases increase with the foreign firm’s distance from the US. Finally, we find that within a country, firms with relatively more readable disclosures attract relatively more US institutional investment.

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Curbing Short-Termism in Corporate America: Focus on Executive Compensation

Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution.

Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution.

The protest against short termism in corporate America is rising. Business and political leaders are decrying the emphasis on quarterly results—which they claim is preventing corporations from making long-term investments needed for sustainable growth.

However, these critics of short termism have a skewed view of the facts and there are logical flaws in their arguments. Moreover, their proposals would dramatically cut back on shareholder rights to hold companies accountable.

The critics of short termism stress how much the average daily share volume has increased over the last few decades. Although this is factually correct, this sharp average increase is caused primarily by a tremendous rise in intraday trading.

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Bebchuk, Cohen, and Wang Win the 2013 IRRCi Academic Award for “Learning and the Disappearing Association between Governance and Returns”

In an award ceremony held in New York City on Tuesday, the Investor Responsibility Research Center Institute (IRRCi) announced the winners of its the 2013 prize competition. The academic award, coming with a $10,000 award prize, went to HLS professor Lucian Bebchuk, HLS Senior Fellow and Tel-Aviv University Professor Alma Cohen, and HBS professor Charles Wang. Bebchuk, Cohen, and Wang received the award for their study, Learning and the Disappearing Association between Governance and Returns, available on SSRN here.

The Bebchuk-Cohen-Wang study was published last month by the Journal of Financial Economics. In presenting the award, IRRCi chair announced that the winning paper “will be valuable … for investors, policymakers, academia, and other stakeholders.”

The study seeks to explain a pattern that has received a great deal of attention from financial economists and capital market participants: during the period 1991-1999, stock returns were correlated with the G-Index, which is based on twenty-four governance provisions (Gompers, Ishii, and Metrick (2003)) and the E-Index, which is based on the six provisions that matter most (Bebchuk, Cohen, and Ferrell (2009)). The study shows that this correlation did not persist during the subsequent period 2000-2008. Furthermore, the study provides evidence that both the identified correlation and its subsequent disappearance were due to market participants’ gradually learning to appreciate the difference between firms scoring well and poorly on the governance indices. Consistent with the learning hypothesis, the study finds that:

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How Do Investors Interpret Announcements of Earnings Delays?

The following post comes to us from Tiago Duarte-Silva of Charles River Associates, Huijing Fu of the Shanghai Advanced Institute of Finance, Christopher Noe of MIT Sloan School of Management, and K. Ramesh, Professor of Accounting at Rice University.

The following post comes to us from Tiago Duarte-Silva of Charles River Associates, Huijing Fu of the Shanghai Advanced Institute of Finance, Christopher Noe of MIT Sloan School of Management, and K. Ramesh, Professor of Accounting at Rice University.

Companies that fail to file a 10-K or 10-Q on time are required by SEC Rule 12b-25 to file a Form NT (NT for non-timely), which provides a narrative explanation for the late filing. No analogous rule exists for earnings announcements, which often precede 10-K or 10-Q filings. For companies that are unable to report earnings by their expected date, therefore, managers face a decision – to keep silent or announce the delay. The SEC has also manifested interest in earnings delays: it recently announced a quantitative model that is expected to supply potential leads to its Division of Enforcement and lists earnings delays as a signal of earnings management.

In our paper, How Do Investors Interpret Announcements of Earnings Delays?, which was recently accepted for publication in the Journal of Applied Corporate Finance, we show that announcements of a delay in the reporting of earnings produce an average one-day abnormal stock return of approximately -6%. So, although announcements of a delay in the reporting of earnings are infrequent, they tend to be associated with a considerable reduction in firm value. In addition, delays precipitated by accounting issues or lacking an explanation result in more negative market reactions than delays related to business events, implementation of new accounting standards, or non-business reasons such as bad weather.

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Giving Good Guidance: What Every Public Company Should Know

The following post comes to us from Alexander F. Cohen, partner and co-chair of the national office of Latham & Watkins LLP. This post is based on a Latham & Watkins client alert by Mr. Cohen, Nathan AjiashviliJeff G. HammelSteven B. StokdykKirk A. Davenport II, and Joel H. Trotter; the full publication, including footnotes and annex, is available here.

The following post comes to us from Alexander F. Cohen, partner and co-chair of the national office of Latham & Watkins LLP. This post is based on a Latham & Watkins client alert by Mr. Cohen, Nathan AjiashviliJeff G. HammelSteven B. StokdykKirk A. Davenport II, and Joel H. Trotter; the full publication, including footnotes and annex, is available here.

Every public company must decide whether and to what extent to give the market guidance about future operating results. Questions from the buy side will begin at the IPO road show and will likely continue on every quarterly earnings call and at investor meetings and conferences between earnings calls. The decision whether to give guidance and how much guidance to give is an intensely individual one. There is no one-size-fits-all approach in this area. The only universal truths are (1) a public company should have a policy on guidance and (2) the policy should be the subject of careful thought.

The purpose of this post is to provide an updated discussion of the issues that CEOs, CFOs and audit committee members should consider before formulating a guidance policy.

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Investing in Good Governance

Editor’s Note: Lucian Bebchuk is a Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School. This post is based on an op-ed article by Professor Bebchuk published today in the New York Times DealBook, available here. The op-ed builds on a forthcoming article with Alma Cohen and Charles Wang, titled “Learning and the Disappearing Association Between Governance and Returns.”

The New York Times published today my column Investing in Good Governance. The column discusses a study by Alma Cohen, Charles Wang, and myself about the correlation between governance and returns. The study, Learning and the Disappearing Association between Governance and Returns, forthcoming in the Journal of Financial Economics, is available here.

Earlier research has shown that, during the 1990s, trading strategies based on the Governance Index (Gompers, Ishii, and Metrick (2003)) and the Entrenchment Index (Bebchuk, Cohen, and Ferrell (2009)) would have produced abnormally high returns in the 1990s. Our study shows that the correlation between governance and stock returns in the 1990s did not subsequently persist. The study also provides evidence that both the correlation in the 1990s and its subsequent disappearance were due to market participants’ gradually learning to appreciate the difference between firms scoring well and poorly on the governance indices. Finally, the study establishes that, although the governance indexes could no longer generate abnormal returns in the 2000s, their negative association with operating performance and firm value persists. After discussing these findings, the DealBook column comments on whether there are any ways left for investors to make money from governance.

The DealBook column is available here.

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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

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    Peter Atkins
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