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 Corporate coworking as a driver of innovation
22.11.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

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

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: First-of-its-kind chemical oscillator offers new level of molecular control

DNA molecules that follow specific instructions could offer more precise molecular control of synthetic chemical systems, a discovery that opens the door for engineers to create molecular machines with new and complex behaviors.

Researchers have created chemical amplifiers and a chemical oscillator using a systematic method that has the potential to embed sophisticated circuit...

Im Focus: Long-lived storage of a photonic qubit for worldwide teleportation

MPQ scientists achieve long storage times for photonic quantum bits which break the lower bound for direct teleportation in a global quantum network.

Concerning the development of quantum memories for the realization of global quantum networks, scientists of the Quantum Dynamics Division led by Professor...

Im Focus: Electromagnetic water cloak eliminates drag and wake

Detailed calculations show water cloaks are feasible with today's technology

Researchers have developed a water cloaking concept based on electromagnetic forces that could eliminate an object's wake, greatly reducing its drag while...

Im Focus: Scientists channel graphene to understand filtration and ion transport into cells

Tiny pores at a cell's entryway act as miniature bouncers, letting in some electrically charged atoms--ions--but blocking others. Operating as exquisitely sensitive filters, these "ion channels" play a critical role in biological functions such as muscle contraction and the firing of brain cells.

To rapidly transport the right ions through the cell membrane, the tiny channels rely on a complex interplay between the ions and surrounding molecules,...

Im Focus: Towards data storage at the single molecule level

The miniaturization of the current technology of storage media is hindered by fundamental limits of quantum mechanics. A new approach consists in using so-called spin-crossover molecules as the smallest possible storage unit. Similar to normal hard drives, these special molecules can save information via their magnetic state. A research team from Kiel University has now managed to successfully place a new class of spin-crossover molecules onto a surface and to improve the molecule’s storage capacity. The storage density of conventional hard drives could therefore theoretically be increased by more than one hundred fold. The study has been published in the scientific journal Nano Letters.

Over the past few years, the building blocks of storage media have gotten ever smaller. But further miniaturization of the current technology is hindered by...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

See, understand and experience the work of the future

11.12.2017 | Event News

Innovative strategies to tackle parasitic worms

08.12.2017 | Event News

AKL’18: The opportunities and challenges of digitalization in the laser industry

07.12.2017 | Event News

 
Latest News

Engineers program tiny robots to move, think like insects

15.12.2017 | Power and Electrical Engineering

One in 5 materials chemistry papers may be wrong, study suggests

15.12.2017 | Materials Sciences

New antbird species discovered in Peru by LSU ornithologists

15.12.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>