Why Earlier Than Normal Earning Release Means Good News (1.3% More Return)

earning release
  • Companies often postpone earning announcements when the news is bad and move up the date of earning announcements when the news is good
  • Possible reasons for a delayed earnings announcement include finding the extra time needed for earning manipulation, preparing for criticism, and hiding news in a period of low attention 
  • Advancers outperform the market by 1.3% and delayers underperform by 1.3% in the month after the scheduled disclosure date 

Companies often postpone earning announcements when the news is bad and move up the date of earning announcements when the news is good.

Companies delay their earnings release the date when the news is bad. Conversely, when companies are excited to share their earnings with the world, they are likely to schedule an earlier-than-normal date. Massachusetts Institute of Technology (MIT) reported that: “Firms that schedule later-than-expected announcement dates subsequently announce worse news than those scheduling earlier-than-expected announcement dates.”

Possible reasons for a delayed earnings announcement include finding the extra time needed for earning manipulation, preparing for criticism, and hiding news in a period of low attention 

We can assume that some firms want extra time to manipulate income and financial information. For example, firms can attempt to accelerate revenue recognition, defer expenses recognition, and apply more estimates to pad their income. Auditors and regulators have a hard time catching estimates on a financial statement due to the subjective nature of those numbers. Bad debt, depreciation expense, provisions can all be used by companies to make their numbers much better than it is. Therefore, you should always look at the cash flow statement in detail. 

Furthermore, another reason for the delay may include preparing for criticism or hiding news in periods of low attention. However, some firms do have real reasons to delay earnings because of scheduling reasons or complex accounting that take up more time.

Advancers outperform the market by 1.3% and delayers underperform by 1.3%

Researchers found that the earlier the result the better the news. On average companies who report earlier outperform the market by 1.3%, while those who delay their report underperform by 1.3% against the market the month after the scheduled disclosure date. However, the effect is greater, the farther the results move forward or back. Once the earning release is reported, the companies typically do see a slight sell-off immediately after the scheduled disclosure date, but the price typically picks right back up for advancers.

The study points to the fact that investors believe that when a company scheduled disclosure date can be a signal to a potentially healthy or unhealthy upcoming report. Therefore, managers can often use this and strategically time news.

My personal experience with advancers

“When I worked as an auditor, I witnessed this firsthand. I had worked for a publicly-traded client who accelerated the date of their annual financial statement report. This created a hectic schedule for our team since we had half of the normally allocated time. Therefore, the practice described here is still used today by managers to boost stock returns.”

Source: Time Will Tell: Information in the Timing of Scheduled Earnings News (2017)

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