The Timing of Earnings Announcements and Market Response to Earnings News

QI SUN

This Version: October 2006

College of Business Administration, California State University San Marcos, SUN:qsun@csusm.edu, (760) 750-4282;

The Timing of Earnings Announcements and Market Response to Earnings News

Abstract
In this paper, we investigate whether the timing of earnings announcements in the earnings seasons aects market response to earnings surprises. We document that market response is more favorable when news announcements are made early in the earnings season (timing eect). Price reactions on earnings announcement dates and price movements in the following 60 trading days are signicantly stronger (weaker) for positive (negative) earnings surprises announced at the beginning of the earnings season. We explore two sources of the timing eect: information transfer and rms strategic timing of news announcements. The timing eect associated with positive earnings surprises is consistent with information transfer in that late good news announcements are accompanied by signicant pre-announcement price increase. The timing eect associated with negative earnings surprises is mainly driven by rms strategic delay of bad news announcements since the timing eect does not exist among bad news announcements that are made earlier than expected.

JEL: Discretionary Disclosure, Information Transfer, Price Discovery, Strategic Timing of News Announcements

I.

Introduction

To assist market eciency, the Securities and Exchange Commission (SEC) requires that companies le their quarterly earnings reports in a timely manner following the end of scal quarter.1 As a result, earnings announcements are clustered in time. On one hand, since earnings announcements are mandatory and their report dates are predictable to a large extent, market response to earnings surprises should be independent of when the news announcement is made in the earnings season.2 On the other hand, the unique information environment of the earnings season implies that market reactions to earnings surprises are correlated with the timing of news announcement. As the earnings season proceeds, market participants information sets grow and information searching activity intensies. Both of them complicate the price discovery process at the beginning and the end of the earnings season. In this paper, we investigate whether the relative timing of earnings announcements impacts market response to earnings surprises and we explore what is the source of the impact. Using a sample of quarterly earnings announcements between year 1985 and 2003, we document that the timing of earnings announcements aects market responses to earnings surprises. Announcements made early in the earnings season receive more favorable feedback than late announcements.3 To illustrate, stocks with extreme positive earnings surprises released in the rst 10 days of the earnings season gain 3.10% over a three-day window surrounding the earnings announcement date. The price of these stocks increases by additional 2.90% in the
1 For example, companies are required to le their quarterly earnings report within 45 days after the scal quarter end. Eective on Nov.15, 2002, the ling deadline for ling quarterly earnings reports are being reduced from 45 days to 35 days over three years, whereas the deadline for ling annual reports are being reduced gradually from 90 days to 60 days. 2 Consistent with conventional wisdom, we dene earnings season as the window of one month after scal quarter end in which a majority of corporate earnings are released to public. 3 In this paper, we dene early and late announcement based on the chronicle order of earnings disclosures in earnings season. In comparison, we dene advanced and delayed announcement based on the reporting pattern of individual rms. An announcement is advanced (delayed) if its report date is earlier (later) than the expected date. See subsection B in section V for more details.

following 60 trading days. In total, these stocks appreciate by 6%. In comparison, stocks with extreme positive earnings surprises disclosed in the last ten days of the earnings season appreciate only 2.87% (1.93% on earnings announcement date and 0.94% in the following 60 trading days). 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% (-2.44% on announcement date and -1.11% in the following quarter) for announcements made in the rst ten days of the earnings season. The value depreciation is much stronger for announcements released in the last ten days of the earnings season: a total price decline of -6.50% with -2.38% on earnings announcement date and -4.12% in the following quarter. We further explore two possible sources of the timing eect: information transfer and rms strategic timing of news announcements. Information transfer occurs when market participants update their beliefs of a rms protability by extrapolating other rms earnings reports. Earnings information transfer occurs within the same industry (Foster (1981), Han and Wild (1990)) and across industries since a rms earnings announcement not only contains information about its own cash ows but also contains implications for the protability of its competitors, suppliers and clients. In the earnings season, massive corporate earnings reports stimulate investors information searching activity, which in turn stimulates information transfer. Consequently, the information content of non-released earnings reports has been supplied by other channels before the public announcement is made. Because of information transfer, the market response to late news announcements is weaker than for it is for early announcements. The timing eect could also be attributed to rms strategic timing of their bad news announcements. Studies (Kross (1981), Givoly and Palmon (1982), Chambers and Penman

(1984), Kross and Schroeder (1984), and Begley and Fischer (1998)) have shown that companies strategically time their public news announcements to optimize the post-announcement stock price. These studies provide empirical evidence that good news is announced relatively earlier than bad news. Delayed announcements more often contain bad news. Consequently, market participants react less favorably to delayed announcements. Given the fact that positive (negative) earnings surprises concentrate at the beginning (end) of earnings season and early (late) announcements tend to be advanced (delayed) from their typical announcement dates, the timing eect could be driven by the penalty on delayed bad news announcements. If the timing eect is due to rms strategic timing of bad news announcements, the timing eect should be the most pronounced among delayed bad news announcements. Our tests show that the timing eect associated with positive earnings surprise announcements is consistent with information transfer. Price reaction and price drift are weaker toward the end of the earnings season. The average price reaction to positive earnings surprises announced at the beginning of the earnings season is 3.10%, which is signicantly stronger than the price reaction of 1.93% associated with announcements made at the end of the earnings season. Information transfer is reected by the signicant abnormal price increase before the public announcement. The size-adjusted cumulative abnormal return of late announcing rms is 0.52% in the rst 10 days and 1.22% in the middle 10 days of the earnings season. The signicant pre-announcement price increase suggests that part of the positive earnings news has been extrapolated from other information channels and thus been incorporated into the stock price. Consequently, the price drift after the earnings announcement is much weaker if the announcement is made at the end of the earnings season. The pre-announcement t price adjustment also applies to negative news announcements. For stocks with negative news released in the last ten days of the earnings season, the average price decline is a signicant -1.30% over

the rst 20 days of the earnings season. However, these late bad news announcements are also accompanied by strong negative price drifts after the announcement date, indicating that the timing eect is not purely driven by information transfer. Our further investigation indicates that rms strategic delay of bad news announcement signicantly contributes to the timing eect associated with negative earnings surprise announcements. First, we study the reporting pattern of individual rms and nd that only 62 percent of bad news announcements are released on time. While rms show little intention to advance or delay good news announcements, they tend to delay bad news announcements. Twenty-ve percent negative earnings surprises are announced after the expected announcement date, whereas only twelve percent are disclosed earlier than expected. The proportion of delayed announcements increases from 7.6% at the beginning of the earnings season to 37.21% toward the end of the earnings season. As expected, the timing eect is the most pronounced among delayed bad news announcements. Both price reaction (-2.96%) and price drift (-5.16%) are signicantly more negative than for advanced or on-time bad news announcements. In addition, the timing eect does not exist among advanced bad news announcements. The price reaction and price drift of these stocks do not vary with the timing of the news announcements. Moreover, these stocks do not signicantly underperform their size decile benchmarks in the following quarter. Our paper is the rst to link the market response to earnings news with the relative timing of earnings announcements in the earnings season. It provides evidence that helps better understand how news about fundamentals is incorporated into stock prices and how clustered corporate events aect the price formation process. For example, the divergent postannouncement price movements indicate that the post-announcement price formation process could be motivated by other events other than solely by a rms own earnings news. Therefore,

post-earnings announcement drift may reect price adjustment to other rms earnings news, which implies that the widely accepted underreaction explanation is overly simplistic. Our results have applicability to policy makers and market participants. Policy makers are promoting timely disclosure for market eciency purposes since there could be incentives and frictions in the reporting process that distort the price discovery process. Evidence documented in this paper justies policy makers promotion of timely information disclosure. Market participants are interested in our results because the relationship between the timing of news announcement and the subsequent price movement will aect their information gathering and trading activities. The remainder of the paper is organized as follows. Section II describes our research sample and variable measurements. Section III presents the evidence on the timing eect. Discussions on the sources of the timing eect are present in section IV and V. Conclusions are drawn in section VI.

II.

Sample Description and Variable Measurement

Our research sample includes stocks listed on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and National Association of Securities Dealers Automated Quotation system (NASDAQ). We exclude real estate investment trusts (REITs), American Depository Receipts (ADRs), and closed-end mutual funds from our sample. To mitigate microstructure eects, we also exclude stocks priced below $5. We obtain actual earnings and nancial analyst earnings forecasts from the Institutional Brokerage Estimate System (I/B/E/S) raw unadjusted earnings dataset (provided upon request). The standard I/B/E/S dataset reports the actual and forecasted earnings-per-share (EPS) that are adjusted for stock splits (i.e. EPS is based on the number of shares outstand5

ing as of today along with a split factor). After making retroactive and cumulative stock split adjustments, estimated and actual EPS are rounded to the nearest cent. The problem with this practice is that comparisons of actual with forecast EPS for rms that have executed stock splits are less precise. Consequently, there is a disproportionate number of rms that exactly meet expectations when in fact they miss or beat expectations.4 Had we utilized the commonly used I/B/E/S standard les, we would have missed a lot of earnings surprises. We obtain data on stock returns and other nancial information from CRSP/COMPUSTAT merged quarterly les and the prices-dividends-earnings les. To ensure that scal quarters are aligned, our sample is restricted to rms with March, June, September and December scal quarter end. By doing so, we drop roughly 15% observations. The sample period runs from 1985 through 2003 because of the constraints of I/B/E/S data.5 We measure earnings surprise by analyst forecast error (AFE). AFE is dened as the difference between the actual EPS for quarter q and the most recent mean consensus analyst forecast for quarter q. The dierence is scaled by the book value per share at the end of quarter q-1.6 We use analyst consensus forecasts as a benchmark because nancial analysts are believed to be the most important information intermediaries between rms and investors. They routinely collect and process information from various channels and disseminate information to the market. Academic studies in accounting and nance have increasingly used analyst forecast as a proxy for market expectation. Empirical studies have shown that nancial analysts help interpret new information. Stock prices react more strongly to earnings that are not
For example, Dell delivered an earnings per share (EPS) of $1.36 in 1994, which beat analysts consensus forecast $0.96 by 40 cents. According to the standard-issue I/B/E/S, however, Dell met analysts expectations with an EPS of $0.02. The much smaller EPS is due to an adjustment factor of 64 for Dell in 1994 in the Adjustment File of I/B/E/S. 5 I/B/E/S starts reporting analyst quarterly earnings forecast in 1984. As a result, few observations are available for 1984. 6 Results using median analyst forecast are not tabulated but have similar pattern. In fact, the median and mean forecasts are similar, with a correlation coecient of 0.998. Untabulted results with lagged price as the scalar are similar to those reported.
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predicted by nancial analysts. In addition, AFE does not require a particular model design for the earnings generating process. To ensure the robustness of our results, we use another earnings surprise measure that is derived from the individual nancial analyst earnings forecast. The consensus earnings forecast is computed every month. As a result, the monthly consensus may not reect the most recent information. Furthermore, if some analysts do not update their forecasts frequently, their forecasts become stale but are still used in the computation of consensus forecasts. Using the most recent individual analyst forecast circumvents the above two problems. The earnings surprise measure based on individual analyst forecast is calculated similarly to the one based on the consensus forecast. The market response to an earnings surprise is measured by price reaction (CAR3 ) and price drift. Price reaction reects the immediate price change surrounding the earnings announcement date. We estimate CAR3 by the sum of daily abnormal returns over the window of [-1, 0, 1], where 0 represents the earnings announcement date from I/B/E/S. Daily abnormal return for rm j on day i is calculated as the dierence between the raw daily return of rm j and the value weighted average returns for NYSE, AMEX and NASDAQ rms in the same size decile based on NYSE breakpoint at the end of the previous year. Including day -1 and 1 is motivated by fact that COMPUSTAT receives reported earnings data from various sources, including newswire, newspapers, and brokers. Since newswire services run beyond the close of trading, announcements appearing during that time interval are dated to the subsequent trading day. As a result, information may have been impounded into security prices on day -1 or 0 for announcements whose announcement date is from the news media, and on day 0 or 1 when announcement date is from newswire services. Price drift reects the price movement in the following quarter after the earnings announce-

ment date. Following existing studies, we estimate price drift over a window of sixty trading days. Specically, we calculate the holding period return (HPR) of a stock over the interval of [2, 61]. We also calculate the HPR of its size benchmark portfolio over the same holding period. Price drift is dened as the dierence between a stocks HPR and the HPR of its respective size benchmark portfolio. When calculating the sixty trading day cumulative return, we make sure that we do not include stock returns during the next earnings announcement period. For a small number of observations, the next earnings announcement date falls into the sixty trading day period, we stop the calculation of price drift one day before the next earnings announcement date.

III.

Timing of Earnings Announcements and Market Responses to Earnings Surprises

Distribution of Quarterly Earnings Announcements

A.

The SEC explicitly requires that quarterly earnings reports be led within 45 days following the end of scal quarter. As a result, earnings announcements are clustered in time. Table I details the distribution of quarterly earnings announcements between 1985 and 2003. The distribution pattern based on overall quarterly earnings announcements shows that only 8.13 percent of announcements are made in the rst 15 calendar days after the scal quarter end. Within 45 calendar days after the scal quarter end, 90.02 percent of rms announce their quarterly earnings performance. On average, 81.90 percent of announcements are made in the earnings season, the time period in which a majority of corporate earnings are released to the public.7 In addition, half of the announcements made in the earnings
In this paper, we dene earnings season as a window starting from day16 of the rst calendar month after scal quarter end and ending on day15 of the second calendar month after scal quarter end. Our denition is based on the conventional wisdom and the distribution of earnings announcements in 5-day intervals after scal quarter end (untabluated).
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season concentrate in the rst ten days. Only 9.98 percent of earnings announcements are made beyond the earnings season (among which only 3.85% are made beyond 2 months after the scal quarter end). Table I also presents the distribution pattern of earnings announcements with extreme earnings surprises. At the end of calendar quarter q, we rank all quarterly earnings announcements released in quarter q into quintiles based on the magnitude of earnings surprises. Extreme positive (negative) earnings surprises are those ranked top (bottom) 20 percent. Despite the extreme magnitude of earnings surprises, a majority of those announcements are still made in the earnings season. The proportion of in-season announcements is 75.86% for extreme negative earnings surprises and 82.67% for extreme positive earnings surprises. However, the proportion of negative news reports released after the earnings season signicantly outnumbers that of positive news reports. 19.31 percent extreme negative earnings reports are disclosed after the earnings season, while it is only 10.36% for reports with extreme positive earnings surprises. Within the earnings season, there is no apparent concentration of negative news announcements in a particular time period. Bad news reports are evenly distributed over the earnings announcement month with 27.76% in the rst 10 days and 21.08% in the last 10 days. In comparison, extreme positive news announcements tend to cluster at the beginning of the earnings season. 40.33% of good news reports are released in the rst 10 days, compared with only 14.41% in the last ten days.

B.

Evidence on the Timing Eect

In this section, we investigate whether the timing of earnings announcements aects the market response to earnings surprises. Market response is measured by the immediate price reaction 9

surrounding the earnings announcement date and price drift in the following quarter. Table II summarizes the evidence based on earning surprise quintiles. The overall impression is that market reacts more favorably to the news released early in the earnings season. For positive earnings surprise announcements, the magnitude of price reaction and price drift monotonically decreases as the earnings season proceeds. To illustrate, stocks with extreme positive earnings surprises on average gain 3.99 percent over three trading days surrounding the earnings announcement date if the news is released before the earnings season starts. The value appreciation continues in the following quarter by additional 4.13 percent. Meanwhile, market reactions to extreme positive earnings surprises disclosed beyond the earnings season are lack of luster. The average immediate price reaction is 1.91 percent, only a half of what can be achieved if news is announced early in the earnings season. Announcing-late stocks also outperform their size benchmark portfolios by a much smaller margin in the following quarter. The 60-day size-adjusted cumulative abnormal return is only 1.34% compared with 3.99% for early announcements. The timing eect is robust throughout the earnings season. Announcements released in the rst 10 days of the earnings season are responded by 3.10% price increase surrounding the earnings announcement date and 2.90% in the following quarter. Both price reaction and price drift are signicantly higher than for announcements made in the last 10 days of earnings season (average price reaction of 1.93% and price drift of 0.94%). For negative earnings surprises, price reaction and price drift are less negative if announcements are made early in the earnings season. Firms with bad news reported before earnings season starts get the least penalty. Average price decrease on announcement date is -1.76 percent, the weakest compared with price reaction to bad news announced in the earnings season. Moreover, these stocks do not underperform their size companion portfolios in the following

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quarter. The cumulative abnormal return over sixty trading days is 0.39 percent, indicating there is no further price decline after the earnings announcement date. In contrast, market reacts strongly to bad news disclosed late in the earnings season. For example, extreme negative surprises released in the last 10 days of the earnings season are accompanied by a total value deprecation of 6.40% (-2.38% surrounding the announcement date and -4.12% in the following quarter), which is more than twice the value depreciation (-3.55%) for early announcements. The dierential market response to news of the same magnitude but occurs at dierent time in the earnings season implies that the timing of announcements aects price discovery process. In the following sections, we explore two sources of the timing eect: information transfer and rms strategic timing of news announcements.

IV.

Information Transfer and the Timing Eect

Studies such as Foster (1981), Han and Wild (1990) have shown that earnings information transfers within the same industry, i.e. stock prices of competing rms react to earnings announcements made by other rms in the same industry. The price comovement arises because rms in the same industry have similar cash ow characteristics. A rms earnings announcement not only discloses rm specic cash ow information, but also contains information about the common elements that aect the protability of all rms in the same industry. Earnings information also transfers across industries. Because the earnings reports of a rms suppliers and clients also shed light on the business growth potentials of a rm. These alternative information channels help alter investors beliefs of a rms protability and induces price changes. In the earnings season, massive corporate earnings reports not only broaden information transfer channels, but also stimulate market participants information searching activities. At 11

the beginning of the earnings season, the lack of massive earnings news to set a distinctive tone to trade in equity market causes investors to wait and hold their interests. As more earnings news hits the market, the buying and selling interests grow. As investors and nancial analysts intensify their information searching and processing, the surprise component in nonreleased earnings reports becomes smaller. Consequently, information transfer causes preannouncement price adjustment, weaker price reaction and weaker price drift for earnings surprises released late in the earnings season. To test the contribution of information transfer to the timing eect, we track stocks abnormal price changes in the earnings season. We divide the earnings season into three subperiods BGN, Middle, and END, with BGN and END refer to the rst and last ten calendar days of the earnings season. We calculate the cumulative abnormal returns over each time interval as the dierence between the holding period return (HPR) of an individual stock and the HPR of its size decile benchmark portfolio.8 Table III summarizes the results based on extreme earnings surprise announcements made in the rst and last ten days of the earnings season. The timing eect associated with positive earnings surprise announcements is consistent with information transfer. The price reaction to news released late in the earnings season is 1.17% smaller than for early announcements. However, before the public disclosure, the sizeadjusted price of late announcing rms has gone up by 1.68% (with 0.52% in the rst 10 days and 1.22% in the following 10 days). The signicant pre-announcement price increase indicates that part of the earnings surprise has been anticipated, and justies the much smaller price reaction and price drift for late announcements. However, the timing eect associated with negative earnings surprise announcements can8

We obtain the value-weighted daily returns of size deciles from Professor Kenneth R. Frenchs web site.

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not be attributed to information transfer. For bad news disclosed in the last ten days of the earnings season, the pre-announcement price decline is -1.30% over the rst 20 days of the earnings season. Despite the signicant pre-announcement price decline, the price reaction to late announcements (-2.38%) is not signicantly smaller than that for early announcements (-2.44%). The insignicant dierence between price reactions may be caused by the bad news travels slowly phenomenon documented by Hong, Lim and Stein (2000). However, bad news travels slowly cannot explain why late announcements are accompanied by a much stronger negative price drift of -4.12%. The strong post-announcement price decline for news announced late in earnings season indicates that the timing eect is not purely driven by information transfer.

V.

Strategic Timing of News Announcements and the Timing Eect

Corporate managers have become increasingly aware of the potential impact that corporate disclosure strategies can have on a rms value. An important element of a rms disclosure strategy is the timing of its public news announcements. Through strategic timing, the management hopes to optimize the post-announcement stock price. Studies have shown that rms strategically choose the time of the day or the day of the week to make news announcements. For example, Gennotte and Trueman (1996) demonstrate that under reasonable conditions, market prices better reect the valuation implications of an earnings announcement when it is made during trading hours rather than after the market has closed. They predict that the average price reaction to news made during trading hours will be more positive than news disclosed after the market is closed. Their prediction is consistent with the empirical evidence documented by Patell and Wolfson (1982), Damodaran (1989), 13

and Francis, Pagach and Stephan (1992). At the intra-week level, Vigna and Pollet (2004) show that rms tend to release bad news on Friday because investors are more distracted from job-related tasks. The limited attention on Friday will mitigate market reaction to bad news. Vigna and Pollet nd that, despite the smaller market reaction due to distraction on Friday, the post-Friday price drift is stronger than that for non-Friday announcement. Since the total value depreciation is indierent for Friday and non-Friday bad news announcements, it indicates that the quality of decision-making is not aected by the timing of bad news announcements. Besides intra-day and intra-week strategic timing, rms also intentionally advance or delay news announcements, depending on the nature of the news. Studies in 1980s (Kross (1981), Givoly and Palmon (1982), Chambers and Penman (1984), and Kross and Schroeder (1984)) document that the announcement delay is negatively related to earnings surprises. Therefore, delayed announcements are accompanied by more negative or less positive abnormal returns on earnings announcement dates. These studies show that reward and penalty are robust after controlling for the sign and magnitude of earnings news. Begley and Fischer (1998) conrm that the good news early, bad news late phenomenon persists in the new litigation environment in 1990s, which would discourages the delay of bad news announcements. There are several reasons why the management have incentives to delay bad news announcements. First, they may be able to complete contract negotiations or security issuance at more favorable terms without the bad news. Second, the management need extra time to resolve disagreement with auditors. Third, the management needs more time to prepare response to criticism or come out with a recovery plan that tones down the negative impact on rms value. Fourth, longer reporting lag gives the management exibility to decide whether to reverse the poor earnings performance through complicated accounting practice such as accruals manage-

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ment. Last, announcing late in the earnings season allows investors to anticipate the bad news so that the impact on the post-announcement stock price is mitigated. It is not common for rms to advance good news announcements. However, rms sometimes advance their good news announcements before the industry leader weighs in with strong earnings performance that steals their own thunder. Strategic timing implies that market response to delayed earnings announcements is less favorable than for advanced or on-time announcements. If announcements released at the end of the earnings season are dominated by delayed ones, the timing eect may be attributed to rms strategic delay of bad news. In the following subsections, we rst investigate the reporting pattern of individual rms. We then check whether the timing eect is the strongest among delayed announcements.

A.

Reporting Pattern of Individual Firms

The distribution of quarterly earnings announcements in Table I indicates that positive earnings reports concentrate at the beginning of earnings season while negative earnings reports cluster at the end of the earnings season. Does the concentration signal rms strategic timing? We examine whether the reporting pattern of individual rms is stable over time. Empirical analysis is done on rms with records of quarterly earnings performance for at least three consecutive scal years. The evidence is presented in Table IV. We calculate the reporting lag (RepLag) for each rm-quarter observation to see how much time it takes a rm to release its quarterly earnings report. RepLag is dened as number of days between the scal quarter end and the day prior to the earnings announcement date. The cross-sectional mean of the within-rm measures indicate that rms on average spend one month (26-32 days) on earnings report preparation. The report for the 4th scal quarter takes 15

a slightly longer time since rms tend to release the annual result together with the 4th scal quarter result. The mean within-rm standard deviation of reporting lag is about 5 days, which is relatively small considering that weekends and holidays will naturally introduce some variation. The stability of a rms reporting pattern is reected in the announcement delay (DEL). In the same manner as in earlier studies (e.g. Begley and Fischer (1998)), we dene DEL for rm i in quarter q and year t as DELi,q,t = RepLagi,q,t RepLagi,q,t1 The mean and median DEL are negative but not signicantly dierent from zero, representing little time trend of reporting lags for individual rms. The mean absolute deviations from the previous year (Mean |DEL|) are of the same magnitude (4-5 days) as the mean standard deviations from the mean reporting lag. It shows that the within-rm variation of reporting lags over time is mainly due to swings in successive reports for the same scal quarter. In a nutshell, evidence in Table IV suggests a relatively regular and predictable reporting behavior by individual companies. However, rms do have some exibility on when to release their quarterly earnings reports. Based on the reporting pattern of individual rms, we dene that an earnings announcement is on time if its DEL satises -5DEL5. An announcement is dened as being advanced (delayed) if its DEL is less (more) than 5.

B.

Strategic Timing of News Announcements and the Timing Eect

In this subsection, we investigate whether the timing eect is a surrogate of reward on advanced announcements or penalty on delayed announcements. Our analysis focuses on announcements with extreme earnings surprises. 16

Table V highlights the average announcement delay (DEL) of announcements made before the earnings season starts, in the earnings season, and after the earnings season. Announcements released at the beginning of the earning season on average are made earlier than the same quarter last year. These early announcements on average are advanced by 2 to 4 days relative to the same quarter last year. Announcements made in the last ten days of the earnings season are on average delayed. The delay is more severe for bad news announcements. For instance, bad news announcements made in the last ten days of the earnings season are delayed by 3 days, compared with less than 1 day for good news announcements. Table V also presents the distribution and proportion of advanced and delayed news announcements. There is little evidence that rms intentionally advance good news announcements. For extreme positive earnings surprises, 70.14% are disclosed on time. The proportion of advanced announcements, although slightly higher, is not signicantly dierent from that for delayed announcements (16.65% versus 13.21%). Advanced good news announcements are spread evenly throughout the earnings season. Among the good news announcements made in the rst ten days of the earnings season, 15.64% are advanced, which is not signicantly higher than the proportion of 14.40% for advanced announcements made in the last ten days of the earnings season. However, rms show a strong intention to postpone their bad news announcements. The proportion of delayed announcements is more than doubled compared with advanced announcements (25.25% versus 12.33%). Delayed announcements are clustered in the last ten days of the earnings season and beyond the earnings season. For example, 37.21% of the announcements made in the last ten days of the earnings season are delayed, which is almost 5 times of the proportion for delayed announcements made early in earnings season. Despite the tendency of delaying bad news announcements, 62.43% of bad news announcements are still on time,

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which conrms the relatively stable reporting pattern by individual rms. Table VII reports evidence on the contribution of strategic delay of bad news announcements to the timing eect associated with extreme negative earnings surprise announcements. Consistent with the prediction of strategic timing, the timing eect is the most pronounced among delayed bad news announcements. The price reaction to delayed announcements made at the end of the earnings season (-2.96%) is signicantly more negative than for advanced (-1.60%) or on-time announcements (-2.18%) released in the same time period. Delayed announcements are also accompanied by the most negative price drift (-5.16%), which is 4 times of the price drift for advanced announcements and doubles the one for on-time announcements. The timing eect does not exist in advanced bad news announcements in that price reaction does not vary with the timing of advanced announcements. Moreover, rms announcing bad news earlier than expected do not signicantly underperform their size benchmark portfolios after earnings announcement date. In summary, the timing eect associated with extreme negative earnings announcements is mainly driven by rms strategic delay of their bad news announcements. The contribution of strategic delay of bad news announcements is robust to the denition of advanced or delayed announcements.9

VI.

Conclusions

In this paper, we study the relationship between the timing of earnings announcements and the market response to earnings surprises on earnings announcement dates and in the following 60 trading days. We nd that announcements made at the beginning of the earnings season receive more favorable feedback (timing eect). Positive earnings surprises reported early in the earnings season are accompanied by larger price increases on and after earnings announceWe run robustness checks by dening on time as -3DEL3, or -1DEL1. Results are similar to the reported ones.
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ment dates than late announcements. Early announcements of negative earnings surprises are associated with the smallest value depreciations. We explore the contribution of information transfer and rms strategic timing of news announcements to the timing eect. The timing eect associated with positive earnings announcements is consistent with information transfer. The price of late announcing rms has signicantly increased before the public news announcement. The pre-announcement price increase indicates that the information content of late announcements has been extrapolated from other information channels, such as earnings reports of rms in related industries and nancial analysts research reports. As a result, the price reaction and price drift are both weaker for late announcements. The timing eect associated with extreme negative earnings announcements is consistent with rms strategic delay of bad news announcements. We study the distribution and proportion of advanced and delayed announcements in the earnings season. We nd that rms have little intention to advance news announcements. Advanced news announcements are distributed evenly in earnings season. However, rms tend to delay the news announcements that deliver bad news to the market. The proportion of delayed announcements increases toward the end of the earnings season. As predicted, the timing eect does not exist among advanced bad news announcements. And the timing eect is the strongest among delayed announcements. In this paper, we have identied two sources of the timing eect. However, we cannot rule out the possibility that other factors also contribute to the timing eect. For instance, the time a rm spends on its earnings report preparation determines the timing of announcement in the earnings season. Therefore, the timing eect could be a proxy for rm characteristics that aects a rms report preparation. We also cannot rule out the possibility that the timing eect is due to investors irrationality. Investors may take announcing late in the earnings

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season as a signal of poor earnings quality because it allows management to evaluate whether to do earnings management and how much the earnings management should be. The timing eect may reect the cost of that exibility. The impact of investors irrationality and rm characteristics such as investor base, litigation risk, proprietary cost, accounting complexity and the nature of earnings news deserve further explorations.

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Ball, Ray, and Philip Brown, 1968, An Empirical Evaluation of Accounting Income Numbers, Journal of Accounting Research 6, 159-178 Ball, Ray, and E. Bartov, 1996, How Nave is the Stock Markets Use of Earnings Information? Journal of Accounting and Economics 17, 309-337 Ball, Ray, and S.P. Kothari, 1991, Security Returns Around Earnings Announcements, The Accounting Review 66, 718-738 Ball, Ray, S.P. Kothari, and Ross Watts, 1993, Economic Determinants of the Relation between Earnings Changes and Stock Returns, The Accounting Review 68, 622-638 Bartov, E., 1992, Patterns in Unexpected Earnings as an Explanation for Post-Announcement Drift,The Accounting Review 67, 610-622 Beyley, J., and P. Fischer, 1998, Is There Any Information in an Earnings Announcement Delay?, Review of Accounting Studies 3, 347-363 Bernard, Victor, 1993, Stock Price Reaction to Earnings Announcements: A Summary of Recent Anomalous Evidence and Possible Explanations, in Advances in Behavioral Finance (edited by Richard Thaler, Russell Sage Foundation, New York, NY) Bernand, Victor, and Jacob Thomas, 1989, Post-Earnings Announcement Drift: Delayed Price Response or Risk Premium? Journal of Accounting Research, Suppl. 27, 1-36 Bernand, Victor, and Jacob Thomas, 1990, Evidence that Stock Prices do not Fully Reect the Implications of Current Earnings for Future Earnings, Journal of Accounting and 21

Economics 13, 305-340 Cao, Charles, Eric Ghysels, and Frank Hatheway, 2000, Price Discovery without Trading: Evidence from the NASDAQ Preopening, Journal of Finance 55, 1339-1365 Chambers, Anne and Stephen Penman, 1984, Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements, Journal of Accounting and Economics 7, 85-107 Chari, V.V., Ravi Jagannathan, and Aharon R. Ofer, 1987, Seasonalities in Security Returns: The Case of Earnings Announcements, Federal Reserve Bank of Minneapolis Research Department Sta Report 110 Daniel, Kent, David Hirshleifer and Avanidhar Subramanyam, 1998, Investor Psychology and Security Market Under- and Overreaction, Journal of Finance 6, 1839-1885 Damodaran, A., 1989, The Weekend Eect in Information Releases: A Study of Earnings and Dividend Announcements, Review of Financial Studies 1989, 607-623 Demsku, J.S., and G.A. Feltham, 1994, Market Response to Financial Reports, Journal of Accounting and Economics 27, 3-40 Foster, George, 1977, Quarterly Accounting Data: Time-Series Properties and Predictive-ability results, The Accounting Review 52, 1-21 Foster, George, 1981, Intra-industry Information Transfers Associated with Earnings Releases, Journal of Accounting and Economics 3, 201-32 Foster, George, Chris Olsen, and Terry Shevlin, 1984, Earnings Release, Anomalies, and the Behavior of Stock Returns, The Accounting Review 59, 574-603 Francis, J., D. Philbrick, and K. Schipper, 1994, Shareholder Litigation and Corporate Disclosures, Journal of Accounting Research 32, 137-164 22

Givoly, D. and D. Palmon, 1982, Timeliness of Annual Earnings Announcements: Some Empirical Evidence, The Accounting Review 57, 486-508 Han, J.Y., and J. Wild, 1990, Unexpected Earnings and Intra-Industry Information Transfers: Further Evidence, Journal of Accounting Research 28, 211-219 Hong, Harrison, Terence Lim and Jeremy C. Stein, 2000, Bad News Travels Slowly: Size, Analyst Coverage, and the Protability of Momentum Strategies, Journal of Finance55, 265-295 Kross, William, 1981, Earnings and Announcement Time Lags, Journal of Business Research 9, 267-280 Kross, William and Douglas Schroeder, 1984, An Empirical Investigation of the Eect of Quarterly Earnings Announcement Timing on Stock Returns, Journal of Accounting Research 22, 153-176 Patell, James M., and Mark A. Wolfson, 1982, Good News, Bad News, and the Intraday Timing of Corporate Disclosures, The Accounting Revoiew 3, 509-527 Vigna, S.D. and Joshua Pollet, 2004, Strategic Release of Information on Friday: Evidence from Earnings Announcements, Working Paper

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Table I: The Distribution of Quarterly Earnings Announcements

This table reports the distribution of quarterly earnings announcements between year 1985 and 2003. The sample of observations is restricted to rms with March, June, September and December scal quarter ends. Announcement date is obtained from the Institutional Brokerage Estimate System (I/B/E/S). Earnings season is dened as a month starting from calendar day 16 of the month after the scal quarter end. Total number of quarterly earnings announcements made in each calendar year, the proportion of announcements made before, during and after earnings season (Before, Earnings Season and After) are reported. Earnings season is further divided into 3 intervals. BGN and Middle cover the rst and second 10 calendar days of the earnings season. END covers the rest of the earnings season. The evidence for the extreme positive and negative earnings surprises is also reported. Extreme Negative Earnings Surprises (Nobs=35,846) Earnings Season After 11.11 11.61 12.33 12.92 11.84 10.66 11.46 10.32 11.76 9.71 9.15 7.78 9.14 11.89 11.34 9.71 8.33 7.38 7.85 9.98 4.83 27.76 27.02 21.08 4.78 4.84 4.35 4.05 3.25 3.91 6.16 6.83 5.59 5.32 4.33 6.08 6.47 8.15 5.51 2.63 2.39 2.63 3.12 35.17 26.10 21.26 19.76 23.25 28.56 27.72 29.72 24.00 23.95 32.14 37.39 29.79 22.01 18.11 28.16 32.93 34.69 26.61 23.28 26.66 30.97 33.99 29.91 25.31 26.37 28.43 33.88 30.07 24.46 19.31 24.11 27.93 32.94 26.94 22.49 22.16 30.64 17.03 18.45 18.62 17.49 18.97 21.16 18.78 17.21 18.01 22.02 21.24 22.21 21.66 19.26 19.98 21.98 24.84 26.41 24.54 19.73 23.96 24.80 24.70 24.62 21.07 20.96 17.79 18.52 18.64 17.84 15.02 17.97 22.64 23.47 20.28 17.35 14.10 15.09 19.31 Before BGN Middle END After Before 4.87 6.01 8.12 6.26 5.86 5.16 8.17 8.20 7.19 9.12 6.54 7.29 9.75 11.07 10.59 4.93 2.24 3.68 3.70 6.97 Extreme Positive Earnings Surprises (Nobs=36,137) Earnings Season BGN 40.56 42.09 36.67 31.18 36.87 43.78 38.96 38.66 35.95 40.45 44.99 51.01 40.99 35.50 33.32 40.42 41.40 46.41 40.16 40.33 Middle 23.26 24.94 31.26 37.15 31.65 25.19 26.93 26.78 32.14 27.79 24.63 18.97 24.92 30.67 33.68 31.46 27.37 23.44 30.42 27.93 END 15.35 14.25 12.53 11.93 12.61 15.40 12.78 14.48 11.29 13.09 15.69 14.93 14.57 11.24 11.31 14.84 19.44 18.21 16.99 14.41 After 15.96 12.69 11.42 13.49 13.01 10.47 13.16 11.89 13.43 9.55 8.15 7.80 9.78 11.51 11.10 8.35 9.54 8.26 8.73 10.36

All Earnings Announcements (Nobs=182,412) Earnings Season BGN 43.29 41.22 34.55 31.83 37.55 44.57 40.01 40.35 35.54 38.22 44.80 49.91 41.68 34.10 32.42 41.27 47.71 49.07 41.10 40.86 27.38 13.66 23.83 25.42 30.81 37.02 31.16 24.52 26.48 27.36 33.22 29.64 24.99 18.44 23.82 30.46 34.56 28.97 23.58 21.55 29.19 14.19 13.50 12.67 11.31 13.51 14.16 12.76 12.57 11.48 13.15 14.35 14.85 13.82 11.96 11.20 13.93 16.36 16.40 15.33 Middle END

Year

Before

24

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

7.59 8.25 9.63 6.92 5.94 6.09 9.30 9.40 8.00 9.28 6.71 9.02 11.55 11.60 10.48 6.13 4.01 5.60 6.53

Average

8.13

Table II: Price Reactions and Price Drifts associated with Earnings Surprises Released at Dierent Time in Earnings Season
This table presents evidence of the impact of announcement timing on the price discover process. At the end of each calendar quarter, earnings surprises (measured by analyst forecast error (AFE)) released in the quarter are ranked into quintile. Extreme positive (negative) earnings surprises are those ranked top (bottom) 20 percent. Price reaction is measured by the cumulative abnormal return over a window of three trading days [-1, 1]. Price drift is measured by the dierence between the holding period return (HPR) of individual stock and the HPR of its size decile benchmark portfolio over a window of 60 trading days [2, 61], where 0 is the earnings announcement date from I/B/E/S.

Panel A

Price Reactions Earnings Season Before BGN -2.44 -0.93 0.16 1.10 3.10 Middle -2.51 -0.79 0.08 1.29 2.66 END -2.38 -1.05 0.26 1.18 1.93 After -1.87 -0.53 -0.02 1.10 1.91 BGN-END -0.06 0.12 -0.10 -0.09 1.17

Extreme Negative Earnings 2 3 4 Extreme Positive Earnings

-1.76 -0.37 0.55 1.75 3.99

Panel B

Price Drifts Earnings Season Before BGN -1.11 -0.94 0.53 0.77 2.90 Middle -2.58 -1.97 -1.07 0.24 1.65 END -4.12 -1.80 -1.05 0.88 0.94 After -2.18 0.51 -0.32 2.06 1.34 BGN-END 3.01 0.86 1.58 -0.10 1.96

Extreme Negative Earnings 2 3 4 Extreme Positive Earnings

0.39 -0.43 0.30 0.66 4.13

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Table 2.2 (continued): Price Reactions and Price Drifts associated with Earnings Surprises Released at Dierent Time in Earnings Season
Panel C presents the number of earnings announcements released in earnings season, before and after earnings season (Before/After). Earnings season is further divided into 3 intervals. BGN and Middle refer to the rst and second 10-day interval of earnings season. END covers the rest days of earnings season. Numbers in bold bracket are the proportion of total announcements made in these event windows.

Panel C

Numbers and Proportions of Observations Earnings Season Before BGN 9,881 [27.73] 15,362 [43.27] 17,857 [47.11] 16,539 [45.51] 14,502 [40.35] Middle 9,633 [27.03] 10,024 [28.23] 9,553 [25.20] 10,400 [28.62] 10,040 [27.94] END 7,532 [21.13] 4,376 [12.33] 3,721 [9.82] 3,993 [10.99] 5,183 [14.42] After 6,891 [19.34] 2,766 [7.79] 2,282 [6.02] 2,454 [6.75] 3,725 [10.36] Total Obs 35,639 [100.00] 35,503 [100.00] 37,905 [100.00] 36,338 [100.00] 35,940 [100.00]

Extreme Negative Earnings

1,702 [4.78] 2,975 [8.38] 4,492 [11.85] 2,952 [8.12] 2,490 [6.93]

Extreme Positive Earnings

26

Table III: Information Transfer and the Timing Eect

This table reports price reactions and price drifts associated with extreme earnings surprises announced in the rst and last ten calendar days of earnings season. Earnings season is divided into three 10-day intervals (BGN, Middle, and END). The cumulative abnormal returns over each 10-day interval are reported. Cumulative abnormal return (CumAbnRet) is calculated as the dierence between the holding period return (HPR) of individual stock and the HPR of its value-weighted size decile benchmark portfolio. Numbers with are signicant at 5% signicance level.

CumAbnRet (SizeAdj) Extreme Surprises Positive Timing BGN END BGN-END BGN END BGN-END Price Reaction 3.10 1.93 1.17 -2.44 -2.38 -0.06 Price Drift 2.90 0.94 1.96 -1.11 -4.12 3.01 BGN 3.72 0.52 Middle 0.77 1.22 END 0.56 2.00

Negative

-2.58 -0.77

0.21 -0.43

0.28 -2.62

27

Table IV: Quarterly Earnings Reporting Pattern of Individual Firms

This table reports evidence on the reporting pattern of individual rms. Reporting lag (RepLag) is dened as the number of days between the scal quarter end and the day prior to the actual earnings announcement date. Announcement Delay (DEL) is the dierence between the RepLag for the current quarter and the RepLag for the same quarter in the previous year. A negative (positive) DEL indicates that earnings report is advanced (delayed). Mean DEL (Median DEL) is the cross-sectional mean (median) of the within-rm measures. The quartile statistics of the absolute value of DEL is also reported.

Fiscal Quarter 1 2 3 4

Mean RepLag 25.82 26.43 25.64 32.47

Std. RepLag 4.88 4.74 4.91 5.64

Range RepLag 14.77 14.22 14.81 16.73

Mean DEL -0.23 -0.24 -0.19 -0.56

Median DEL 0.00 -0.06 0.00 -0.20

Mean |DEL| 4.41 4.14 4.33 4.69

Q1 |DEL| 2.45 2.28 2.40 2.40

Median |DEL| 3.56 3.33 3.46 3.60

Q3 |DEL| 5.33 5.00 5.25 5.63

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Table V: The Timing of Earnings Announcement and Earnings Announcement Delay (DEL)
This table reports the announcement delay (DEL) for announcements with extreme earnings surprises. DEL is dened as RepLag(i, q, t) RepLag(i, q, t 1), where RepLag(i, q, t) is the number of days between the scal quarter end and the day prior to the earnings announcement date. Earnings announcements are On Time if -5DEL5. Announcement are Delayed (Advanced) if DEL>5 (DEL<-5). BGN and Middle refer to the rst and second 10-day interval of earnings season. END covers the rest of days in earnings season. Numbers with * are signicant at 5% signicance level. Numbers in bold brackets are the proportions of observations relative to the column sum.

Earnings Season Earnings Surprise Extreme Positive Advanced Before -12.81 [25.10] -1.07 [73.29] 7.06 [1.61] -3.88 1,928 BGN -12.17 [15.64] -0.56 [78.79] 7.39 [5.57] -1.93 10,996 Middle -13.65 [16.98] 0.01 [66.97] 8.49 [16.06] -0.95 7,250 END -15.10 [14.40] -0.10 [61.76] 12.09 [23.84] 0.64 3,528 After -16.82 [16.60] 0.13 [49.47] 23.56 [33.92] 5.26 2,367 Nobs 4,350 [16.65] 18,323 [70.14] 3,452 [13.21]

On Time

Delayed

Average Nobs

26,125

Extreme Negative

Advanced

-14.10 [20.50] -0.83 [77.33] 7.42 [2.17] -3.37 1,429

-13.12 [12.93] -0.36 [79.46] 7.21 [7.60] -1.44 7,879

-13.84 [12.82] 0.41 [63.68] 8.89 [23.50] 0.57 7,183

-16.71 [9.54] 0.31 [53.25] 12.69 [37.21] 3.29 5,189

-17.48 [11.11] 0.67 [36.81] 25.51 [52.08] 11.59 4,564

3,235 [12.33] 16,383 [62.43] 6,626 [25.25]

On Time

Delayed

Average Nobs

26,244

29

Table VI: Strategic Timing of Negative Earnings Surprise and Timing Eect
This table presents the impact of strategic timing of negative earnings surprise announcements on price reactions (CAR3) and price drifts. Earnings announcements are On Time if -5DEL5. Announcement are Delayed (Advanced) if DEL>5 (if DEL<-5). DEL is dened as RepLag(i, q, t) RepLag(i, q, t 1), where RepLag(i, q, t) is the number of days between the scal quarter end and the day prior to the earnings announcement date. Price reaction is measured by the cumulative abnormal returns over a window of three trading days [-1, 1]. Price drift is the cumulative abnormal return over a window of 60 trading days (i.e. [2, 61]), whereas 0 stands for the report date of earnings surprise from I/B/E/S. Daily abnormal return is the dierence between raw return and return of size decile to which the stock belongs.BGN (END) refers to the rst (last) 10 calendar days of the earnings season. B-E refers to the dierence between BGN and END. Numbers in bold bracket are the proportions of announcements relative to the column sum. Panel A Price Reactions and Price Drifts Earnings Season Before Advanced (A) On Time (OT) Delayed (D) A-D OT-D CAR3 Price Drift CAR3 Price Drift CAR3 Price Drift CAR3 Price Drift CAR3 Price Drift -2.46 0.97 -1.33 0.97 0.60 0.55 BGN -2.05 -1.40 -2.46 -0.51 -2.41 0.73 0.36 -2.13 -0.05 1.24 Middle -1.83 -0.96 -2.47 -1.73 -2.67 -1.88 0.84 0.92 0.20 0.15 END -1.60 -1.27 -2.18 -2.43 -2.96 -5.16 1.36 3.89 0.78 2.73 After -1.24 -0.80 -1.66 -0.42 -2.38 -2.55 B-E -0.45 -0.13 -0.28 1.92 0.55 5.89

Panel B Advanced (A) On Time (OT) Delayed (D) Total Nobs

Numbers of Observations 3,235 [12.33] 16,383 [62.43] 6,626 [25.25] 26,244 [100.00] 293 [20.50] 1,105 [77.33] 31 [2.17] 1,429 [100.00] 1,019 [12.93] 6,261 [79.46] 599 [7.60] 7,879 [100.00] 921 [12.82] 4,574 [63.68] 1,688 [23.50] 7,183 [100.00] 495 [9.54] 2,763 [53.25] 1,931 [37.21] 5,189 [100.00] 507 [11.11] 1,680 [36.81] 2,377 [52.08] 4,564 [100.00]

30