Earnings day is a moveable feast

October 22, 2014

Oct 22 (Reuters) – If companies ran Christmas the way they
run their earnings announcements, Santa Claus would usually come
early, but when he is late, watch out!

What’s more, it looks like if you as an investor pay close
attention to companies which bring forward or delay earnings
releases, you might just be able to front run or fade Santa.

“Calendar revisions should be treated as significant sources
of information ahead of the actual announcements,” according to
Eric So of the Massachusetts Institute of Technology’s Sloan
School of Management, who authored a new study about what
happens to stocks when companies move their earnings day. (here)

The study found not only a strong relationship between
companies advancing or delaying their earnings announcements and
how good the news turned out to be, but also between that and
subsequent stock performance.

Unlike Christmas, corporate earnings days are a moveable
feast, and how executives decide to schedule them turns out to
be a strong leading indicator.

Between 2006 and 2013 there were 18,959 instances when firms
made calendar changes to previously scheduled announcements at
least two weeks before the planned event.

Obviously, these changes are divided between when firms move
up earnings announcements, and when they move them back. I’ll
spare you the detail, but the author devised a scoring system
which weighted announcement changes based on how far forward or
backward companies were pushing their news.

As you might expect, executives like to move forward good
news and, perhaps in hopes of rescue, like to delay the bad.
Companies with advanced earnings showed greater return on
assets(ROA), same-quarter growth in ROA and better analyst-based
earnings surprises, as compared to the delayers.

While various theories have been put forward to explain this
phenomenon, maybe the best one is that it is human nature to
want the good to happen quickly and to delay the less good, or
bad. By extension, it seems likely that there is more
re-checking of figures by taxpayers who’ve calculated they owe
unexpectedly more, while the big refunds probably find their way
more quickly into the mailbox.

One hint does come from the fact that among companies where
the managers “face greater career concerns” the results are even
stronger, suggesting that insiders use their superior knowledge
to protect and advance their own interests.

PLAY IT AS IT LAYS

The most interesting part of the research is that, despite
all of this being so intuitive, investors really don’t fully
react to expectations that a move forward in an announcement is
good and a delay a harbinger of the bad.

Shares of advancers, those which move dates forward,
outperform delayers by 2.60 percentage points in the month after
calendar revisions are announced. Advancers beat the market by
about 138 basis points during the month, while delayers
underperform by 130 basis points.

Even more striking is how slow those moves, one way or
another, are in coming. The cumulative outperformance of
advancers over delayers is just 50 basis points two days before
earnings day, but nearly doubles on the day the good or bad news
comes out. One day later and the cumulative outperformance hits
200 basis points.

While the study makes no guesses, it seems likely to me that
most professional investors are highly involved in the
narratives they have constructed about the companies they invest
in: what they expect to see in earnings, where the company and
its shares are going. That makes following a naive strategy such
as buying if they move news forward and selling if they delay a
lot harder, especially given that the strategy is by definition
a blind one.

Think of this as a career problem not just for company
managers but for money managers. Money managers don’t market
themselves as ‘arbitragers of the obvious’ for the rather simple
reason that this is a difficult proposition to present as unique
or worthy of high compensation. Far better to prattle on about
your strong team of company analysts and your many and in-depth
discussions with company management, or better yet something
even more amorphous and harder to replicate.

So don’t expect the “Long/Short Good News/Bad News Fund” any
time soon. Also don’t expect company managers to change, the
common denominator being that both groups are human.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

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