In today’s fast-paced financial markets, the timely and accurate disclosure of material information is crucial for investors to make informed decisions. However, some managers may seek to exploit investors‘ cognitive constraints and processing capacity to strategically hide negative news. In this blog post, we explore a recent research study conducted by Caleb Rawson, Brady J. Twedt, and Jessica C. Watkins, titled „Managers’ Strategic Use of Concurrent Disclosure: Evidence from 8-K Filings and Press Releases,“ published in The Accounting Review (2023). The study investigates how managers may use concurrent disclosures to distract investors and increase the processing costs associated with unfavorable information. The central question addressed in the study is whether managers strategically issue concurrent disclosures about unrelated events alongside the disclosure of material negative news. The researchers hypothesize that managers may use this tactic to divert investor attention and hinder the market’s reaction to the negative news, thereby exploiting investors‘ processing limitations.
The 8-K Filings and Press Releases
Form 8-K is a filing required by the U.S. Securities and Exchange Commission (SEC) for companies to disclose material corporate events that are of importance to investors. Concurrently, many firms issue press releases alongside their 8-K filings to provide additional information and context to the disclosed events. Typically, these press releases are assumed to be related to the same event that triggered the 8-K filing.
The Unexplored Tool: Concurrent Unrelated Press Releases
The study explores an interesting alternative scenario in which managers may issue concurrent press releases about unrelated events when disclosing negative news in the 8-K. The researchers suggest that such unrelated press releases may be used strategically to distract investors from the negative news, increasing their information processing costs. This behavior, if prevalent, can potentially hinder market efficiency with respect to negative 8-K disclosures.
Supporting Evidence and Findings
The researchers analyze a sample of 49,652 non-earnings-related 8-K filings for public firms between 2005 and 2018. They find that for approximately one-third of the 8-K filings in their sample, the concurrent press release is unrelated to the underlying 8-K event. This indicates that the assumption that concurrent press releases are always related to the triggering event is frequently invalid.
The study’s main prediction is supported by the data: when an 8-K contains negative news, firms are approximately 7 percent more likely to issue a concurrent unrelated press release rather than a related one. This finding suggests that managers may strategically use unrelated press releases to distract investors from the negative information in the 8-K.
Distinguishing Strategic Behavior from Bundling
To address potential alternative explanations, the study distinguishes this strategic behavior from other forms of bundling news. For instance, managers might bundle positive and negative news together to offset price declines or bundle negative news with other negative news to make it difficult to discern individual impacts. However, the researchers provide evidence that unrelated press releases are a distinct phenomenon from bundling for offsetting or noise purposes.
Managers‘ Incentives to Increase Processing Costs
The study also explores cross-sectional variations in the decision to issue unrelated press releases. Managers with upcoming insider sales and those with less discretion in their 8-K reporting (non-7.01 and 8.01 8-Ks) are more likely to issue unrelated press releases concurrently with negative news 8-K filings. Additionally, managers are more likely to use this tactic when investors are more cognitively constrained, such as after market hours.
Impact on Market Efficiency
Finally, the researchers examine whether the use of unrelated press releases successfully diverts investor attention from negative 8-K news and impedes the market’s reaction. As predicted, they find that the speed of price formation following negative 8-K news is significantly slower when firms issue concurrent unrelated press releases. This suggests that unrelated press releases effectively reduce investor attention to negative 8-K disclosures, leading to a reduction in price responsiveness.
The study sheds light on a previously unexplored aspect of managers‘ disclosure strategies. By issuing concurrent unrelated press releases alongside negative 8-K filings, managers may strategically hide unfavorable information and hinder market efficiency. Investors should be aware of this tactic and remain vigilant when analyzing a company’s disclosures.
In conclusion, the research offers valuable insights into how managers utilize disclosure channels to influence investor behavior. It underscores the importance of transparency and timely disclosure in financial markets and the need for investors to carefully scrutinize companies‘ press releases and 8-K filings. By staying informed and vigilant, investors can better navigate the complex landscape of financial disclosures and make more informed investment decisions.
Find the article here.