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: Can we see monkeys from space? Emerging technologies to map biodiversity

An international team of scientists has proposed a new multi-disciplinary approach in which an array of new technologies will allow us to map biodiversity and the risks that wildlife is facing at the scale of whole landscapes. The findings are published in Nature Ecology and Evolution. This international research is led by the Kunming Institute of Zoology from China, University of East Anglia, University of Leicester and the Leibniz Institute for Zoo and Wildlife Research.

Using a combination of satellite and ground data, the team proposes that it is now possible to map biodiversity with an accuracy that has not been previously...

Im Focus: Climate satellite: Tracking methane with robust laser technology

Heatwaves in the Arctic, longer periods of vegetation in Europe, severe floods in West Africa – starting in 2021, scientists want to explore the emissions of the greenhouse gas methane with the German-French satellite MERLIN. This is made possible by a new robust laser system of the Fraunhofer Institute for Laser Technology ILT in Aachen, which achieves unprecedented measurement accuracy.

Methane is primarily the result of the decomposition of organic matter. The gas has a 25 times greater warming potential than carbon dioxide, but is not as...

Im Focus: How protons move through a fuel cell

Hydrogen is regarded as the energy source of the future: It is produced with solar power and can be used to generate heat and electricity in fuel cells. Empa researchers have now succeeded in decoding the movement of hydrogen ions in crystals – a key step towards more efficient energy conversion in the hydrogen industry of tomorrow.

As charge carriers, electrons and ions play the leading role in electrochemical energy storage devices and converters such as batteries and fuel cells. Proton...

Im Focus: A unique data centre for cosmological simulations

Scientists from the Excellence Cluster Universe at the Ludwig-Maximilians-Universität Munich have establised "Cosmowebportal", a unique data centre for cosmological simulations located at the Leibniz Supercomputing Centre (LRZ) of the Bavarian Academy of Sciences. The complete results of a series of large hydrodynamical cosmological simulations are available, with data volumes typically exceeding several hundred terabytes. Scientists worldwide can interactively explore these complex simulations via a web interface and directly access the results.

With current telescopes, scientists can observe our Universe’s galaxies and galaxy clusters and their distribution along an invisible cosmic web. From the...

Im Focus: Scientists develop molecular thermometer for contactless measurement using infrared light

Temperature measurements possible even on the smallest scale / Molecular ruby for use in material sciences, biology, and medicine

Chemists at Johannes Gutenberg University Mainz (JGU) in cooperation with researchers of the German Federal Institute for Materials Research and Testing (BAM)...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Plants are networkers

19.06.2017 | Event News

Digital Survival Training for Executives

13.06.2017 | Event News

Global Learning Council Summit 2017

13.06.2017 | Event News

 
Latest News

Study shines light on brain cells that coordinate movement

26.06.2017 | Life Sciences

Smooth propagation of spin waves using gold

26.06.2017 | Physics and Astronomy

Switchable DNA mini-machines store information

26.06.2017 | Information Technology

VideoLinks
B2B-VideoLinks
More VideoLinks >>>