Many companies seek to effectively paper over bad news contained in filings with the Securities and Exchange Commission by publishing unrelated press releases on the same day, according to a release on a new multi-year study from Jessica Watkins, an assistant professor of accountancy at the University of Notre Dame, Caleb Rawson, an assistant professor of accounting at the University of Arkansas and Brady Twedt, a University of Oregon accounting professor.
Based on their reviews of about 50,000 non-earnings 8-K filings made from 2005-2018, the researchers asserted that many companies engage in a practice of publishing “simpler, unrelated press releases to divert attention from the harder-to-read regulatory filings” that contained negative news, such as details on insider stock sales.
“Overall, our findings shed light on a previously unexplored tool managers use to exploit investors’ processing capacity constraints to ‘hide’ negative news. Such behavior may be a signal that finance leaders and regulators can utilize to get a sense of how transparent firms and managers are in their financial reporting,” Watkins wrote in an emailed response to questions from CFO Dive.
The study comes as accounting and regulatory oversight are drawing sharper scrutiny in the wake of a series of high profile corporate collapses including that of crypto exchange FTX last year as well as the more recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank.
In total, about 40% of 8-Ks reviewed in the study conveyed what the researchers characterized as negative information, and in one-third (33%) of the cases, the company also made a different announcement via a press release that same day. The negative 8-Ks were also more likely to be made public on Fridays or after-hours, typically times when there are fewer investors eyeing the information, the release states.
Companies must announce “major events that shareholders should know about” by making an 8-K filing within about four days of the triggering event, according to the SEC’s investor.gov website.
Watkins said the practice of concurrent 8-Ks and releases is not a violation of generally accepted accounting principles or SEC regulations. But the study’s findings shed light on the impact it has on the broader public market, she said.
By drawing their attention away from the negative disclosure, fewer people access the 8-K filings and that results in slower price discovery, Watkins said. The practice is “negatively associated with the speed with which prices reflect the news and the number of times that the 8-K itself is downloaded from the SEC’s EDGAR website,” according to a summary of the findings emailed by Watkins.
The study is expected to be published in the July issue of The Accounting Review, according to Watkins.