Friday no longer best day for releasing bad news

That is one of the conclusions drawn by economist Leon Zolotoy in his research, for which he will be awarded a PhD at Tilburg University in the Netherlands on 25 June. Zolotoy researched how international stock markets react to new information.

The Sarbanes-Oxley Act was introduced in July 2002, partly as a result of the corporate scandals involving WorldCom, Enron, Tyco and QWest. The Act’s strict disclosure requirements were designed to restore investors’ and analysts’ confidence in the stock market.

Economist Leon Zolotoy studied the effect of this legislation, in particular how quickly company information is impounded in stock prices. According to his analyses, the speed of adjustment is increasing, which implies that the American stock markets have become more efficient in terms of information. At the same time, however, analysts’ company earnings forecasts have become more pessimistic. Zolotoy concludes that analysts have become more cautious in interpreting the information released by companies.

‘Friday effect’

On a more general level, Zolotoy believes that the speed with which share prices respond to new information is strongly related to both the timing of information disclosure and to legislation. Stock markets can be made more efficient via legislation such as the American Sarbanes-Oxley Act. Zolotoy also argues that the timing of bad-news disclosures by companies is gradually becoming less important, as evident in the gradual decline of the ‘Friday effect’, for example. Companies have tended to release bad news on a Friday rather than on any other day on the assumption that traders will not react to the news immediately due to the approaching weekend. However, Zolotoy’s research shows that the benefits of this strategy appear to have diminished strongly over time.

Leon Zolotoy (1977, Moscow, Russia) studied Economics and Business Administration at the Ben-Gurion University in Israel (MA summa cum laude). He began his PhD research in 2005 at the CentER for Economic Research at Tilburg University. Part of his research was carried out at the Leonard N. Stern School of Business at New York University. In September 2008, Zolotoy will take up the post of Assistant Professor / Senior Lecturer at the Melbourne Business School in Australia.