Published February 23, 2009

Delaying announcement of poor results may well backfire

By WONG WEI KONG

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THERE'S safety in numbers, obscurity too. And this must have something to do with the pace of earnings announcements so far. About 500-odd companies listed on the Singapore Exchange are due to report their results for the full year ended Dec 31, 2008 by the end of this week.

To date though, only around a hundred-odd companies have done so, which means some 400 or more companies are set to report their FY2008 earnings over the coming few days. And there may be more to this than just being late.

After all, the timing of an earnings announcement is part and parcel of earnings management. The timing of earnings announcements, in fact, has been the subject of academic research over the years, with studies concluding that on average, delayed earnings announcements are usually associated with negative earnings surprises.

One US study, for instance, linked the continued dominance of bad news in Friday announcements not just to the desire of managers to take advantage of limited media coverage near the weekend. Managers also appeared to take advantage of other aspects of investors' behaviour, such as the tendency towards quieter trading before the weekend, to manage stock price responses to their companies' financial news.

Several papers have also investigated the 'strategic disclosure' hypothesis (such as Patell and Wolfson 1982; Damodaran 1989; Bagnoli et al 2005). In each of these papers, a comparison is made between pooled groups of firms making disclosures at different times of the day and/or on different days. These papers generally conclude that managers are strategically timing their announcements of bad news to take advantage of reduced media coverage and investor attention, typically at the end of the business day and/or on the weekend.

So it's probably not an accident that many local firms are now choosing to make their FY2008 results announcements so late into the 60-day reporting period.

Given that the tone of the current reporting season is decidedly negative, one can speculate that many companies are delaying the announcement of bad news for as long as possible. And they are probably hoping that they will escape media and market attention if they announce the bad news together with a mass of other firms close to the reporting deadline after the market closes this Friday.

But does delaying bad news really spare companies from adverse market reaction?

Companies may want to take note of the results of a study by the College of Business Administration, California State University San Marcos, in 2006. Using a sample of quarterly earnings announcements in the US between year 1985 and 2003, it documented how the timing of earnings announcements affects market responses to earnings surprises.

The findings? Announcements made early in the earnings season receive more favourable feedback than late announcements. To illustrate, stocks with extreme positive earnings surprises released in the first 10 days of the earnings season gained 3.10 per cent over a three-day window surrounding the earnings announcement date. In comparison, stocks with extreme positive earnings surprises disclosed in the last 10 days of the earnings season appreciated only 2.87 per cent.

For negative earnings surprise announcements, the market response is less negative if the news announcement is released at the beginning of the earnings season. For example, the average value depreciation is 3.55 per cent for announcements made in the first 10 days of the earnings season. The value depreciation is much stronger for negative announcements released in the last 10 days of the earnings season - a total price decline of 6.50 per cent.

Of course, all this is not to suggest that every company reporting late in the earnings season is doing so deliberately. Corporate headquarters location, industry membership, volatility of earnings and cash flows, the number of analysts covering the firm, and the size of the firm are all significant explanatory variables in the timing of earnings announcements, as one 2007 US study pointed out.

But for firms thinking of delaying the announcement of bad news just so to manage market reaction, they should remember that it may actually backfire. There's just no excuse for tardy disclosure, in both good and bad times.