Be Prompt or Be Punished: Why Do Investors Discount Earnings Announced Late?

Abstract

Holding earnings surprise constant, investors react negatively to late earnings announcements. One standard deviation of announcement delay (about 5 days) corresponds to 23 bps lower abnormal returns over a two-day announcement window. We show that the results are robust to further controlling for various firm and earnings characteristics as well as the industry effect. We reject the hypothesis that the lower announcement returns are due to higher market risk or idiosyncratic risk for stocks with late earnings announcements. We find no evidence supporting the hypothesis that earnings announced late are more susceptible to management manipulation. Despite the lack of evidence on earnings manipulation, our results support the perceived disclosure credibility hypothesis. That is, investors view earnings with delayed announcements and the management as less credible. Consistent with the perceived disclosure credibility hypothesis, we find that investors discount positive earnings news more than negative earnings news when the announcements are delayed. In addition, analysts downgrade earnings forecasts following late announcements, evidence that delayed reporting has a negative effect on the credibility of the management. Moreover, investors discount late earnings announcements more when firms have weaker external governance, proxied by lower institutional ownership and analyst coverage. Finally, we show evidence that investors pay more attention to earnings announced late than to earnings announced on time. The negative reactions to late earnings announcements reflect investors’ better understanding of the implication of current earnings on future earnings as future earnings information is efficiently impounded into current stock prices.