Are managers strategic in reporting non-earnings news? Evidence on timing and news bundling

Abstract

Using a comprehensive sample of non-earnings 8-K filings from 2005 to 2013, we examine whether firms strategically report mandatory and voluntary news. In particular, we examine whether firms report negative news when investor attention is low and whether they bundle positive and negative news. Our findings support the notion that managers believe in the existence of investor inattention and strategically report negative news after trading hours. These results particularly apply to public firms, where equity market pressures provide stronger incentives to mitigate market reaction to news by exploiting investor inattention. Further analysis of the market reaction to strategic disclosure uncovers no evidence of investor inattention, consistent with market efficiency. We also observe that public firms are more likely to strategically disclose through news bundling and that the likelihood of this increases with the likelihood of strategic disclosure through timing.

Selective disclosure and the role of Form 8‐K in the post‐Reg FD era

“…While Reg FD‐specific 8‐Ks mitigate pre‐8‐K differences in information for analysts of high‐ versus low‐connection firms, the mosaic exception appears to allow significant differences in the amount and precision of idiosyncratic information to persist. Alternatively, Segal and Segal () characterize Reg FD disclosures as more voluntary, suggesting voluntary disclosures may be more effective at leveling the playing field than mandatory 8‐K filings.…”

“…A number of recent studies provide evidence consistent with management making strategic disclosure decisions around 8‐K filings. Firms take longer to file 8‐Ks when there is a higher level of uncertainty about the events, and they are more likely to file when investor attention is low if 8‐Ks contain negative news (Goldstein & Wu, ; Segal & Segal, ). Moreover, firms engaged in strategic timing of 8‐K filings are also more likely to bundle positive news with negative news items (Segal & Segal, ).…”

“…Firms take longer to file 8‐Ks when there is a higher level of uncertainty about the events, and they are more likely to file when investor attention is low if 8‐Ks contain negative news (Goldstein & Wu, ; Segal & Segal, ). Moreover, firms engaged in strategic timing of 8‐K filings are also more likely to bundle positive news with negative news items (Segal & Segal, ). Strategic 8‐K filings are consistent with evidence that in the post‐Reg FD period, managers increased their use of public earnings forecasts to guide analysts’ forecasts down (Heflin, Kross, & Suk, ) and with what one analyst described as management's effort to “paper things up” [with an 8‐K] (Brown et al., ), thus casting doubt on their effectiveness in leveling the field.…”

“…Corporate management is not prohibited from “disclosing a non‐material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a ‘mosaic’ of information that, taken together, is material.” Firms may also be strategic in filing 8‐Ks. Management can time the filings of many 8‐Ks within the confines of the regulations and bundle certain news items to avoid or minimize negative reactions from the capital markets (Goldstein & Wu, ; Segal & Segal, ; Tian, ). Strategic filing of 8‐Ks to “paper things up” (Brown et al., ) along with the “mosaic” exception cast doubt on the effectiveness of 8‐K filings in leveling the playing field.…”

Abnormal Accruals and Managerial Intent: Evidence from the Timing of Merger Announcements and Completions

“…Using 8‐K filings, Segal and Segal () find strong evidence of opportunistic reporting of negative news by managers, but no evidence of inattention or undereaction to the strategic disclosures. It is important to note that our analysis does not require that investors be less attentive on Fridays.…”