Public companies that are forced to disclose bad news through required Securities and Exchange Commission filings are likely to issue press releases announcing unrelated news around the time of the filing to distract investors, according to a new
Caleb Rawson, an accounting researcher at the University of Arkansas, studied thousands of Form 8-K filings by public companies between 2005 and 2018 accompanied by press releases on the same day and found that compared to companies whose filings contained positive or neutral information, companies disclosing negative information were 7% more likely to concurrently issue a press release featuring positive, unrelated news.
"We think this is an interesting result beyond the typical accounting research circles," said Rawson, an assistant professor and author of the study, in a statement Tuesday. "It highlights how managers are strategic about disseminating information they want covered. They make it easier and more convenient for journalists to get the information they want them to get and thus bury bad news about their firm. They know news wires are easier to pay attention to than the sometimes tedious mining of regulatory filing databases."
SEC rules require public companies that are experiencing a "material event" to file a Form 8-K on the SEC's EDGAR database within a certain time period. These events include earnings announcements, changes in an executive or director, changes in auditor, and issuing new debt or equity. The news can be good or bad, and companies often issue news releases explaining the event.
Rawson and his colleagues at the University of Oregon and the University of Notre Dame examined a sample of 49,652 non-earnings-related Form 8-Ks and chose filings in which the firms issued a press release on the same day as the 8-K. They categorized the public 8-K disclosures as "good" or "bad" news and used textual analysis to identify whether the press release pertained to the same event mentioned in the 8-K.
They found that one-third of the filings in their sample had an accompanying press release focused on an event or news differing from the underlying event that triggered the 8-K, contradicting the general assumption that press releases issued on the same day as an SEC filing are usually related to the same event.
The researchers also found the use of concurrent, unrelated press releases tempers the market reaction to negative news by drawing investors' attention away from the disclosure. The speed of price formation following negative 8-K news was significantly slower when the company issued a simultaneous but unrelated press release. The researchers corroborated these results by finding that the 8-K itself was downloaded fewer times from the SEC's EDGAR website.
"Collectively, our findings shed light on a previously unexplored tool managers use to exploit investors' processing capacity," Rawson said in a statement. "There are only so many disclosures an investor can process at the same time, and when faced with multiple disclosures, it takes longer for investors to interpret what is going on. If an investor processes a disclosure, he or she will often forego the benefit of processing another one. Our findings suggest managers know this and exploit investors' limited processing capacity for their benefit."
The study will be published in The Accounting Review, published by the American Accounting Association.
