Companies are more likely to issue unrelated press releases on the same day SEC filings convey ... [+]
Companies are more likely to issue unrelated press releases on the same day SEC filings convey negative news, according to a study forthcoming in The Accounting Review.
The SEC created Form 8-K for publicly traded companies to disclose on a current basis the occurrence of material corporate events. Some of these events can be positive news or neutral information like the selection of a board member. Other 8-K filings convey negative news to investors like an executive being terminated or an impairment of an asset.
In a study titled "Managers’ Strategic Use of Concurrent Disclosure: Evidence from 8-K Filings and Press Releases” researchers analyzed 49,652 non-earnings related 8-Ks filed by companies between 2005-2018. For all the 8-K filings examined in the study, the company also issued a press release on the same day. The study is authored by Caleb Rawson from the University of Arkansas, Brady Twedt of the University of Oregon, and Jessica Watkins from the University of Notre Dame.
“We wanted to examine whether managers strategically used and timed press releases to distract investors from concurrent news that they were filing with the SEC that they did not want investors to focus on. Press releases are a lot easier to read than regulatory filings, so it seemed possible that managers could provide easy to read, unrelated press releases to divert attention away from harder to read regulatory filings,” says Rawson.
The researchers classified each 8-K as being negative or non-negative based on the tone of the words in the filing. The same day press releases were classified as being about the same event or an unrelated event based on how similar the words were in the press release and the 8-K. Overall, about 40% of the 8-Ks examined in the study conveyed negative news and 33% of the 8-Ks were accompanied by a same day, unrelated press release. Not surprisingly, the study reports that 8-Ks with negative news are more likely to be filed on Fridays or after-market hours, consistent with managers strategically issuing bad news during periods of low investor attention.
“We find that managers are more likely to issue a same day press release about some other unrelated event when the 8-K is negative versus not negative. This behavior is more frequent when a manager has an upcoming stock sale. In other words, an incentive to hide the negative news. This behavior has real economic consequences by slowing down how fast the market incorporates the information from the 8-K into the firms' stock price and results in fewer people reading the 8-K filing,” notes Rawson.
Rawson concludes, “Overall, our results imply that the market can be distracted by managers providing different information in an easier to process format like a press release. If you are on the receiving side of press releases, it is important not to assume that the press releases are covering the sole event that is going on at a company. There may be more going on than meets the eye.”
