Who doesn’t love the spotlight? Like (almost) everyone else, CEOs like public attention. But what about times when firms have to release bad news? Then, CEOs, and management in general, may be glad of low attention in the markets. If they have to release bad news, lower market attention leads to a smaller price impact. So, hiding bad news when investors pay no attention allows management to soften the consequences.
Hiding bad news
DeHaan, Shevlin, and Thornock throw some light on managers’ strategic use of inattention in their 2015 Journal of Accounting and Economics paper “Market (in)attention and the strategic scheduling and timing of earnings announcements”. The basic assumption is that attention is lower after trading hours, on Fridays, and when many firms publish announcements. This allows firms to hide bad news in a bunch of new information.
No reaction to news
The authors’ main question is whether publishing bad information when overall attention is low limits the news’ impact. They measure low overall attention via three dummy variables:
- AFTER (one after trading hours, zero otherwise),
- FRIDAY (one on Fridays, zero otherwise), and
- EAFREQ (one when many firms publish earnings, zero otherwise).
(Negative) Earnings surprises are the (bad) news at the firm-specific level. To quantify the reaction to news, the authors use four different proxies:
- the number of news articles containing the firm name recorded by data provider RavenPack (NEWSCOUNT),
- the speed at which analysts update their earnings forecasts for the firm (ANALYST_SPD),
- the number of firm-specific document downloads from the SEC EDGAR database (EDGAR), and
- the Google Search Volume Index of the firm (GOOGHITS) – a proxy we discussed before here.
Do markets react less when attention is low?
The main analysis is a regression of the reaction proxies as dependent variables on the dummy variables, and firm-specific control variables. We present the results in Table 1.
Table 1: Tests of variation in market reaction. Information taken from Table 3 of deHaan et al. (2015). Bold font indicates statistical significance at the 5% level or higher.
Table 1 shows that news during low-attention times generate smaller reactions. For example, information published after trading hours leads to 7.3% fewer articles, or 19.4% fewer document downloads from EDGAR. Similar results hold for news published when many firms publish their earnings announcements. In contrast, news published on Fridays do not draw less attention.
Firms strategy: Hiding bad news when investors pay no attention
Firms are apparently aware of this attention effect. The authors run a regression of unexpected earning (UE, the difference between realized earnings per share and the analyst forecast) as the dependent variable on the dummy variables. The coefficient estimate is significantly smaller than zero. Hence, firms release bad news during periods of low attention.
Takeaway: Pay attention when no-one else does
In summary: Managers are mindful of their reputation. Anything that draws attention to their (actual or perceived) failings, such as not meeting expected earnings, can damage their reputation and harm their careers. Hence, they try to find periods of low attention when they are forced to release negative news. The take-away for investors: Pay attention when no-one else does, because firms release negative information when they believe investors to be otherwise occupied.