Share prices continue to decline steeply after public companies file for an extension with the Securities and Exchange Commission on their financial statements, according to a new academic study.
The study, by Professors Eli Bartov of New York University and Yaniv Konchitchki of University of California Berkeley, found that share prices dropped significantly as soon as companies filed Form NT (for Non-Timely) with the SEC, even when management declares it will meet the extended deadline for filing their financial statements. The study appears in in the December issue of the American Accounting Association journal Accounting Horizons.
When companies file Form NT within a day of a filing deadline, they are usually given automatic extensions (15 days for annual reports, five days for quarterly reports). If the new deadline is met, the SEC generally classifies statements as timely and imposes no penalties.
The researchers investigated 2,115 Form NT filings over a nine-year period for 10-Q quarterly statements and 10-K annual statements. They found “a significantly larger negative reaction to NT filers that subsequently failed to file [statements] within the grace period when compared to firms that meet the [new] deadline. Critically, we find this result regardless of whether the NT filing includes management's declared intention to subsequently file within the grace period...[which] suggests that investors are able to see through management assertions that turn out to be false.”
While the immediate response to the Form NT filings may be negative from investors, the researchers suggest it should be even more negative. “On average, abnormal returns for both NT 10-Q and NT 10-K filers continue to drift downward during the post-filing months…Return on assets is significantly negative for late 10-K and 10-Q filers during the NT filing period as well as during the following two quarters. Together these findings are consistent with…NT filings conveying information about deeper problems [than that of] missing an SEC filing deadline.”
During the five-day period surrounding the filing of Form NT, companies sustain a mean reduction in stock returns (adjusted for key market and risk variables) of 2.93 percent if the NT is for the 10-Q statement and 1.96 percent if it’s for the 10-K. The market especially punishes companies that indicate they will file their 10-Q within the grace period and then fail to do so, imposing five-day drops of 2.02 percent on companies that subsequently meet the extended deadline, but over twice that penalty, 4.12 percent, on companies that then miss it.
While these reductions are dramatic, the researchers estimate a further share-price decline averaging about 13 percent happens during the next three quarters, approximately five times bigger than the five-day drop. “Investors do not fully incorporate the negative implications of the late filings around the filing date,” they wrote. “One way to interpret this finding is that the initial NT release sugarcoats the true reason for the filing delay.”
