Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Releasing Bad Earnings News Earlier Means Fewer Lawsuits

09.02.2011
When companies are looking at bad earnings news, a new study from the University of Iowa suggests it's best to remember what we learned as kids.

"If a child does something wrong and tells his mother about it, he'll probably be in less trouble than if mom finds out about it on her own," said Richard Mergenthaler, an accounting professor in the Tippie College of Business.

Likewise, Mergenthaler's new study finds that the earlier a firm announces bad earnings news, the less likely it will be sued by unhappy shareholders. In fact, his research found that companies that wait until the last few weeks of a quarter to announce they will not meet analysts' earnings expectations are 45 times more likely to face shareholder lawsuits than firms that make the announcement in the first weeks of the quarter.

"The earlier a company communicates the information to the market, the better off they'll be," said Mergenthaler, whose study "The Timeliness of Earnings News and Litigation Risk" is co-authored by Dain Donelson, John McInnis and Yong Yu, all of the University of Texas at Austin.

Avoiding earnings-related shareholder lawsuits has huge financial implications, Mergenthaler said. From 1996-2005, U.S. firms shelled out more than $15 billion in total settlements for securities related class-action lawsuits, and billions more fighting lawsuits that never made it to settlement.

Firms that are sued by shareholders also suffer an enormous cost to their reputations, Mergenthaler said, so avoiding such suits helps companies' bottom lines.

Mergenthaler and his co-researchers looked at 423 firms that were sued by shareholders after reporting lower earnings than expected by analysts between 1996 and 2005. They then found 423 companies that reported similar earnings news during the same quarter but were not sued, then looked to see when analysts became aware that the company expected earnings to miss projections.

They found that most firms that were sued waited until near the reporting date to announce that they expected to miss forecasts. Non-sued firms, on the other hand, consistently reported bad earnings news earlier.

"At the halfway point of the quarter, more than 55 percent of the bad news is revealed on average for non-sued firms, compared to less than 25 percent for sued firms," Mergenthaler said.

Mergenthaler suspects there are two reasons for this. First, when releasing bad news earlier, the market has time to digest the news before the earnings are actually released and the firm's stock doesn't suffer as much of a price shock.

The earlier release date also diminishes the likelihood that stockholders will interpret poorer than expected earnings as a sign of management fraud, and doesn't provide evidence that attorneys could use to accuse management of fraud. Since shareholders must prove fraud to win a lawsuit, an early warning provides them with less evidence.

Richard Mergenthaler, rick-mergenthaler@uiowa.edu; 319-335-0848; Tom Snee, University News Service, tom-snee@uiowa.edu, 319-384-0010 (office), 319-541-8434 (cell)

Richard Mergenthaler | Newswise Science News
Further information:
http://www.uiowa.edu

Further reports about: Earnings Lawsuits Mergenthaler bad earnings news unhappy shareholders

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Exotic quantum states made from light: Physicists create optical “wells” for a super-photon

Physicists at the University of Bonn have managed to create optical hollows and more complex patterns into which the light of a Bose-Einstein condensate flows. The creation of such highly low-loss structures for light is a prerequisite for complex light circuits, such as for quantum information processing for a new generation of computers. The researchers are now presenting their results in the journal Nature Photonics.

Light particles (photons) occur as tiny, indivisible portions. Many thousands of these light portions can be merged to form a single super-photon if they are...

Im Focus: Circular RNA linked to brain function

For the first time, scientists have shown that circular RNA is linked to brain function. When a RNA molecule called Cdr1as was deleted from the genome of mice, the animals had problems filtering out unnecessary information – like patients suffering from neuropsychiatric disorders.

While hundreds of circular RNAs (circRNAs) are abundant in mammalian brains, one big question has remained unanswered: What are they actually good for? In the...

Im Focus: RAVAN CubeSat measures Earth's outgoing energy

An experimental small satellite has successfully collected and delivered data on a key measurement for predicting changes in Earth's climate.

The Radiometer Assessment using Vertically Aligned Nanotubes (RAVAN) CubeSat was launched into low-Earth orbit on Nov. 11, 2016, in order to test new...

Im Focus: Scientists shine new light on the “other high temperature superconductor”

A study led by scientists of the Max Planck Institute for the Structure and Dynamics of Matter (MPSD) at the Center for Free-Electron Laser Science in Hamburg presents evidence of the coexistence of superconductivity and “charge-density-waves” in compounds of the poorly-studied family of bismuthates. This observation opens up new perspectives for a deeper understanding of the phenomenon of high-temperature superconductivity, a topic which is at the core of condensed matter research since more than 30 years. The paper by Nicoletti et al has been published in the PNAS.

Since the beginning of the 20th century, superconductivity had been observed in some metals at temperatures only a few degrees above the absolute zero (minus...

Im Focus: Scientists improve forecast of increasing hazard on Ecuadorian volcano

Researchers from the University of Miami (UM) Rosenstiel School of Marine and Atmospheric Science, the Italian Space Agency (ASI), and the Instituto Geofisico--Escuela Politecnica Nacional (IGEPN) of Ecuador, showed an increasing volcanic danger on Cotopaxi in Ecuador using a powerful technique known as Interferometric Synthetic Aperture Radar (InSAR).

The Andes region in which Cotopaxi volcano is located is known to contain some of the world's most serious volcanic hazard. A mid- to large-size eruption has...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Call for Papers – ICNFT 2018, 5th International Conference on New Forming Technology

16.08.2017 | Event News

Sustainability is the business model of tomorrow

04.08.2017 | Event News

Clash of Realities 2017: Registration now open. International Conference at TH Köln

26.07.2017 | Event News

 
Latest News

New thruster design increases efficiency for future spaceflight

16.08.2017 | Physics and Astronomy

Transporting spin: A graphene and boron nitride heterostructure creates large spin signals

16.08.2017 | Materials Sciences

A new method for the 3-D printing of living tissues

16.08.2017 | Interdisciplinary Research

VideoLinks
B2B-VideoLinks
More VideoLinks >>>