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 Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

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: Bifacial Stem Cells Produce Wood and Bast

Heidelberg researchers study one of the most important growth processes on Earth

So-called bifacial stem cells are responsible for one of the most critical growth processes on Earth – the formation of wood.

Im Focus: Energizing the immune system to eat cancer

Abramson Cancer Center study identifies method of priming macrophages to boost anti-tumor response

Immune cells called macrophages are supposed to serve and protect, but cancer has found ways to put them to sleep. Now researchers at the Abramson Cancer...

Im Focus: Ten-year anniversary of the Neumayer Station III

The scientific and political community alike stress the importance of German Antarctic research

Joint Press Release from the BMBF and AWI

The Antarctic is a frigid continent south of the Antarctic Circle, where researchers are the only inhabitants. Despite the hostile conditions, here the Alfred...

Im Focus: Ultra ultrasound to transform new tech

World first experiments on sensor that may revolutionise everything from medical devices to unmanned vehicles

The new sensor - capable of detecting vibrations of living cells - may revolutionise everything from medical devices to unmanned vehicles.

Im Focus: Flying Optical Cats for Quantum Communication

Dead and alive at the same time? Researchers at the Max Planck Institute of Quantum Optics have implemented Erwin Schrödinger’s paradoxical gedanken experiment employing an entangled atom-light state.

In 1935 Erwin Schrödinger formulated a thought experiment designed to capture the paradoxical nature of quantum physics. The crucial element of this gedanken...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Our digital society in 2040

16.01.2019 | Event News

11th International Symposium: “Advanced Battery Power – Kraftwerk Batterie” Aachen, 3-4 April 2019

14.01.2019 | Event News

ICTM Conference 2019: Digitization emerges as an engineering trend for turbomachinery construction

12.12.2018 | Event News

 
Latest News

A New Home for Optical Solitons

23.01.2019 | Physics and Astronomy

Graphene and related materials safety: human health and the environment

23.01.2019 | Materials Sciences

Blood test shows promise for early detection of severe lung-transplant rejection

23.01.2019 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>