When public companies need to report important news about their business, finding the best day to release it to Wall Street is crucial, especially if they want (or don’t want) investors to pay attention.
“Companies tend to rush out and share good news, and when they have bad news, they tend to push it back,” said an associate professor of accounting at MIT Sloan.
So and colleagues recently conducted a study that helps isolate the impact of timing when public companies release their earnings reports. Their findings could take on added significance as companies prepare to post first-quarter results following the biggest quarterly drop for U.S. equities since the financial crisis of 2008.
Along with an MIT Sloan professor of accounting, and Suzie Noh, a PhD candidate at the school, So created a methodology to assess the timing factor using calendar rotations, which are set changes in the timing of companies’ earnings announcements, driven by the day of the week on which a month begins.
“One of the broader academic objectives of this study was to figure out: What is the actual impact of timing? It’s pretty tricky to figure out," So said. "This is something that has been on the back burner in our minds for a long time.”
Using a sample of 19,252 firm quarters between 2004 and 2017 for several thousand U.S. public companies, the authors constructed a model that takes into account when and in what order companies announced their earnings. In doing so, they were able to measure whether there were increases in media coverage, attention from investors, and earnings announcement premiums — the tendency for a stock to rise when a company reports its results.
Across the board, the answer was a resounding yes, according to the results released in “Calendar Rotations: A New Approach for Studying the Impact of Timing using Earnings Announcements.”
“There’s an economically large premium associated with being moved earlier,” So said. “The stock returns move up around 50 basis points for those [announcements] that are moved forward versus moved back. For a lot of these companies, it’s an economically large change in their stock price.”
Boston parking restrictions spark research idea
The idea to use calendar rotations to figure out the impact of timing came from So, who lives with his wife in Boston, where residents face parking restrictions on specific days of the week. When So found himself trying to determine what dates the first and third Monday fell on and which were the second and third Thursday so that his car wouldn’t get towed, he realized that he had stumbled on a framework that he could use for earnings reports.
“When I thought about how much effort went into figuring out which one of these would come first and noticing that the ordering of which side of the street we could park on depended on when the calendar month began, it occurs somewhat randomly, which was really intriguing from the perspective of a researcher,” So said.
More than a third of all public companies comply with this similar pattern of fixed rotations when releasing earnings, So said, which provided a strong sample for the researchers to pull from.
Verdi attributed a preference for a set schedule to the cost and hassle involved with changing an earnings release date. Most companies stick to a set schedule that “investors are prepared to follow, the media is prepared to follow, and the management team is prepared to follow,” Verdi said. “When you change [a date], you’re shocking everybody, and there are costs involved if you reschedule.”
Media favors companies that report early
An advance in an average company’s reporting order by one standard deviation can cause a 7% to 8% increase in media coverage.
One of the most important findings of the authors’ research was that companies whose earnings announcements are moved forward by a calendar rotation usually receive more media coverage.
Using newspaper and newswire coverage from RavenPack News Analytics Dow Jones Edition (which collects news from Dow Jones Newswires, Barron’s, MarketWatch and regional editions of The Wall Street Journal), the authors found that an advance in an average company’s reporting order by one standard deviation can cause a 7% to 8% increase in media coverage.
So and Verdi believe this is because earlier earnings potentially contain novel news about the general state of the economy or the industry a company operates in.
“Firms are often correlated economically,” So said. “The earnings of Pepsi are probably relevant and informative for the earnings of Coke. If Coke were to move earlier, when Coke announced their earnings, it would take away a lot of the novelty of Pepsi's announcement, because we kind of know what they're going to say.”
A bump in trading volume
Results from the study showed that a company’s stock is more frequently traded when its earnings announcement is moved forward by a calendar rotation; on the flipside, it’s less frequently traded when delayed.
“When companies get a lot of attention, their prices tend to become pushed artificially high,” So said of the increase in earnings announcement premia. “When a company announces earnings and there's a lot of attention, the prices tend to predictively rise around the announcements, and then eventually revert back to normal levels.”
The authors estimated that stock returns rise around 50 basis points for those companies that are moved forward in the queue versus moved back. “For a lot of these companies, it’s an economically large change in their stock price,” said So, who estimated that it takes around 60 trading days to reverse the gains. “A significant portion of the earnings announcement premium seems to be driven by variation in attention. Timing plays such an important role in driving this economically large phenomenon.”
