Understanding the Disclosure Practices of Firms Affected by a Natural Disaster: The Case of Hurricanes

Abstract

This paper investigates the disclosure practices of firms affected by hurricanes. I document that when a hurricane hits, there is an increase in investor uncertainty. During the hurricane period (approximately ten days), there is an increase in abnormal volume, stock volatility, spread, and illiquidity for firms that later report that they experienced hurricane damage. I find that firms with little to no impact from the hurricane disclose this information immediately after the hurricane. In contrast, firms impacted by the hurricane delay reporting the damage until the next earnings announcement. Furthermore, firms with “good news” that the hurricane had little damage to operations disclose this news in the headlines of the earnings release (high salience) while firms that disclose a negative impact are more likely to bury the news in the body of the earnings press release (low salience). I also find that hiding the news in the body of the text has attenuating effect (weaker stock market reaction) on those firms that disclose qualitative and not quantitative hurricane damage. These results are interesting for both US and international audiences because managers in all countries that experience natural disasters have to decide how to make disclosures about these news. The results also suggest that management’s strategic disclosure practices can be successful in reducing stock price volatility.

Keywords: mandatory disclosure, voluntary disclosure, natural disasters

JEL Classification: G14, M41, M48