Rob Swystun, Pristine Advisers
There’s a lot to love about Fridays. Everything at work is just a little more relaxed, the weekend is hanging around at the exit, waiting to pick you up and whisk you away as soon as you get off … and people have been known to drift away from work a little early on Friday afternoon. Trying to get ahold of someone for work past about 3 p.m. on a Friday is just this side of impossible (not a hard worker like you, though; other, less career-focused people).
It’s Friday’s reputation as a bit of a lazy walk-through in anticipation of the drunken antics of the weekend (or sober, quiet reflection in your case) that has traditionally made it the go-to day for companies to dump bad news on unsuspecting investors. Had a poor quarter? Who cares? It’s almost the weekend!
In fact, as Lee Simmons points out in a Stanford Business article published in The Atlantic, companies had gotten so accustomed to offloading news about earnings shortfalls, product recalls and outrageous severance deals on the final weekday that it prompted Footnoted.com to start its brilliantly-titled Friday Night Dump, where it sifts through SEC filings submitted at the end of the work week for juicy bad news tidbits.
But, a new study is shedding light on the Friday bad news phenomenon and revealing some not-so-surprising results. While this trick may have worked once upon a time in the dark ages (here meaning pre-social media saturation), it doesn’t appear to work any longer. In fact, late-Friday releases may be getting more scrutiny nowadays due to the whole weekend effect.
The study, Market (In)Attention and Earnings Announcement Timing, written by Stanford Graduate School of Business accounting professor Ed deHaan, Terry Shevlin of the UC Irvine Merage School of Business and Jake Thornock of the University of Washington Foster School of Business, compiled a data set of more than 120,000 quarterly earnings announcements from 2000 through 2011, with precise date and time stamps.
They then compared that with actual behavior of market players following an announcement, including: the number of related articles published, downloads of 8-K filings, Google searches, and the time it took for analysts to update their forecasts.
The researchers found that markets do, in fact, seem to get distracted. But it’s not Friday and the call of the weekend that distracts markets, it’s just general busyness and off-hours that do it.
The findings show that earnings reported after hours and on busy days are significantly worse (relative to consensus forecasts) than at other times.
What they also found is that because companies change the timing of the quarterly announcements often enough, when they do seem to time a release to get lost in the shuffle of a busy day, it doesn’t look like it was done on purpose.
“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.”
While the researchers obviously couldn’t know a firm’s intentions with their release timing in any given case, deHaan says, when looked at as a whole, “it seems that managers do try to hide bad news by announcing it in periods of low attention.”
And, on the flip side of that, it looks like there is also strategic release times for good news, 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.”
Advantages to Strategic Timing
On the surface, strategic timing of bad and good filings look like they’re done to either limit the negative effect or boost the positive effect on stock prices.
But, deHann says stock prices aren’t really the reason companies strategically time releases. It has more to do with the media coverage the company and management receives.
“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.”
It can also be a means to have some control over stock volatility, the researcher speculates.
“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.”
The reasoning is that if you quietly release the bad news when the market is a bit preoccupied, you can at least stave off some of this bouncing from traders with itchy trigger fingers (or, more realistically, computers with itchy trigger … cables?).
And more companies seem to be doing just that. In 2000, 22% of earnings announcements were made during trading hours and in 2011, that had dropped to 2%, with the majority either being released right before markets open or right after they close.
And, why wouldn’t companies strategically release bad news? The cost of moving your earnings announcement is $0, so if it works, great, and if it doesn’t, nothing lost.
“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.”
The last little interesting tidbit to all of this is that if you schedule an earnings announcement for Friday, even the act of scheduling it will cause your stock to lose points, even before you release the information.
So, consider your timing carefully and try not to get distrac — oh, hey look, it’s almost the weekend!