Does burying bad news work for public companies?

02 March 2020

By Dan Segal

For public companies looking to bury bad news so the stockmarket doesn’t react unkindly there is, well, bad news.

My research found that sending out a press statement when the stockmarket has closed will do nothing to dampen the fall in your stock price, you may as well send it out at 9am as usual.

But the good news about burying bad news, is that ‘bundling’ does work. That is mixing the bad news with some good news to give it a more favourable spin. This does work in softening any fall in the stock price.

For many corporate communications departments there is the feeling that sending out some negative news late on a Friday night after the stockmarket has shut (this, we found, is a relatively popular time to send out bad news) is a lot better than disclosing it on Monday morning.

Indeed, our study showed that the more negative the news the more likely it was released after the stockmarket had closed. And when we looked at non-public companies (137,647 of them) they were far less likely to report any bad news after hours.

Moreover, the larger the public firm the more likely it was to try to hide bad news by releasing it after hours, plus the higher the operating risk of the business the more likely it was to send out any negative news in the evenings.

Perhaps managers are thinking investors will have more time to contemplate the news, or it will be overtaken by events, or maybe stockpickers will simply forget about it.

But our study has discovered that it is just that, a feeling, and not based on any evidence. It would be somewhat naïve to think that investors go home, forget about their work and come back on Monday as if nothing has happened. Thanks to our phones we are all connected to our work now, 24/7. Indeed, with most of the trading done by algorithms these days it would be foolish to think that these computers are ever switched off.

Our study debunked this long held belief of pushing news out quietly in the evening, by examining the use of Form 8-K in the US from 2005 to 2013. This form is used to announce major events of interest to shareholders but does not include earnings and quarterly results announcements, which have been shown to be impervious to timing.

After eliminating forms that contained financial statements, specialist statements on asset-back securities and multiple filings we were left with a sample of 167,470 8-K forms filed by 5,685 US firms. We looked at the disclosure of voluntary and mandatory news, which companies have four business days to unveil.

An analysis of the forms showed that 51 per cent of them were released after trading hours, of which more than 40 per cent were released on Friday night, with the practice on the rise. Over the eight years studied the number released after hours on a Friday increased by seven percentage points.

The news being attempted to be buried can range from imminent bankruptcy or receivership, the departure of directors or top executives, to notices of delisting and the announcement of an impairment, ie when a businesses’ asset is reduced in value.

Unsurprisingly, the biggest market fall came when a bankruptcy or receivership was announced, with, on average a 17.5 per cent drop in share price. Other news that elicited a significant market reaction included notice of delisting, notices of an increase in direct financial obligations, announcing that previously filed financial statements are being corrected and impairments or write downs.

Does bundling bad news with good work?

When we looked at the impact of news being released during normal working hours, after trading hours and after the stockmarket had closed on a Friday, we found no difference in the reaction of the stockmarket. There was no evidence that leaving the announcement until after the market had closed softened the blow on the stock price.

In fact, for one sort of announcement the stockmarket reaction was worse when it was announced after trading hours, and that was when companies revealed that previously issued financial statements or audit reports were incorrect and needed altering.

But bundling, now that did work. Once again we found that public firms were a lot more likely to put good and bad news together in an 8-K filing form than those not listed, while larger firms were also more likely to bundle positive and negative announcements. This is consistent with the idea that due to stockmarket concerns managers try to mitigate the effect of the bad news.

We also found that those firms who are fond of putting out negative news after trading hours are also more likely to bundle bulletins. 

It is not always easy to come up with a positive piece of news when needed and nobody is going to believe anything outlandish or too unrealistic. Thus, the effect is difficult to quantify as it depends on the quality of the positive news, but our analysis showed it does work. However, it is difficult to isolate the impact of bundling due to sample limitations.

One announcement that tends to get investors twitchy is when a director resigns from a board. Sitting on the board of a public company is a lucrative business, so why resign? (This is another announcement that tends to get made after trading hours).

Our hypothesis was that they expect the company to perform poorly in the future and they don’t want their reputation to be tarnished.

And, lo and behold, up to three years after the director has resigned we found that earnings and stock returns had underperformed significantly.

But this only applied when the reason given for stepping down was vague, such as “family reasons” or “personal circumstances had changed” or gave no explanation at all. There was no such dip in performance when the directors declared it was because of illness or they were retiring, these are verifiable after all.

So investors are aware that something fishy is going on when a director resigns without a good explanation and factor that into their trading. If the reason is vague it will lead to a negative reaction in the stockmarket.  

Directors will say they don’t want to rock the boat or gain a reputation as a troublemaker, but it is naïve to think investors will not react negatively to a resignation unless there is a good reason for it.

So you can’t fool the market, though by bundling you can soften the blow somewhat.

Further reading:

Segal, D., Rubin, A. and Segal, B. (2019) "Analysts’ ability and reaction to non-earnings news", Journal of Financial and Quantitative Analysis.

Rubin, A., Segal, B. and Segal, D. (2017) "The Interpretation of unanticipated news arrival and analysts’ skill", Journal of Financial and Quantitative Analysis, 52, 4, 1491-1518.

Segal, B. and Segal, D. (2016) "Are managers strategic in reporting non-earnings news? Evidence on timing and news bundling", Review of Accounting Studies, 21, 4, 1203-1244.


Dan Segal is Distinguished Research Environment Professor at Warwick Business School and Professor of Accounting at the Interdisciplinary Center Herzliya. He teaches Accounting and Financial Management on the Executive MBA.

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