Be Prompt or Be Punished: Why Do Investors Discount Earnings Announced Late?

58 Pages Posted: 24 Apr 2018

See all articles by Linda H. Chen

Linda H. Chen

University of Idaho

George J. Jiang

Washington State University

Kevin X. Zhu

Hong Kong Polytechnic University

Date Written: April 5, 2018

Abstract

Holding earnings surprise constant, investors react negatively to late earnings announcements. One standard deviation of announcement delay (about 5 days) corresponds to 23 bps lower abnormal returns over a two-day announcement window. We show that the results are robust to further controlling for various firm and earnings characteristics as well as the industry effect. We reject the hypothesis that the lower announcement returns are due to higher market risk or idiosyncratic risk for stocks with late earnings announcements. We find no evidence supporting the hypothesis that earnings announced late are more susceptible to management manipulation. Despite the lack of evidence on earnings manipulation, our results support the perceived disclosure credibility hypothesis. That is, investors view earnings with delayed announcements and the management as less credible. Consistent with the perceived disclosure credibility hypothesis, we find that investors discount positive earnings news more than negative earnings news when the announcements are delayed. In addition, analysts downgrade earnings forecasts following late announcements, evidence that delayed reporting has a negative effect on the credibility of the management. Moreover, investors discount late earnings announcements more when firms have weaker external governance, proxied by lower institutional ownership and analyst coverage. Finally, we show evidence that investors pay more attention to earnings announced late than to earnings announced on time. The negative reactions to late earnings announcements reflect investors’ better understanding of the implication of current earnings on future earnings as future earnings information is efficiently impounded into current stock prices.

Keywords: Earnings Announcement, Delayed Reporting, Investor Reaction, Disclosure Credibility, Price Efficiency

JEL Classification: G12, G14

Suggested Citation

Chen, Linda H. and Jiang, George and Zhu, Kevin X., Be Prompt or Be Punished: Why Do Investors Discount Earnings Announced Late? (April 5, 2018). Available at SSRN: https://ssrn.com/abstract=3157915 or http://dx.doi.org/10.2139/ssrn.3157915

Linda H. Chen

University of Idaho ( email )

Department of Accounting
College of Business and Economics
Moscow, ID 83944-3174
United States

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Kevin X. Zhu

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
153
Abstract Views
1,203
Rank
347,135
PlumX Metrics