10-Q Filings Research Articles

Sub-Investment Grade US Oil Companies in Focus

Low oil prices have led to CAPEX cuts across the world and especially in the US. We have examined a sample of US sub-investment grade oil and gas producers to assess the risk to production levels of a prolonged period of low oil prices. We assessed their hedging books, production levels and CAPEX cuts as announced in their SEC 10-Q filings in our analysis. From our analysis up to 1mn b/d of US production could be at risk in 2016, should present market conditions continue. However as long as oil prices remain above operational cost of production, oil output from producing wells is unlikely to be impacted.

The Information Content of Risk Factor Disclosures in Quarterly Reports

SYNOPSIS I examine whether recently required risk factor update disclosures in quarterly reports provide investors with timely information regarding potential future negative economic events. Specifically, I examine whether risk factor updates in 10-Q filings are associated with negative abnormal returns at the time the updates are disclosed and whether quarterly updates are followed by negative earnings shocks. I find that firms presenting updates to their risk factor disclosures have significantly lower abnormal returns around the filing date of the 10-Q relative to firms without updates. I also find that firms with updates to their risk factors section have significantly lower future unexpected earnings and are more likely to experience future extreme negative earnings shocks. These findings suggest that the recent disclosure requirement mandated by the SEC was successful in generating timely disclosure of bad news. JEL Classifications: M41; M48; D80; G18. Data Availability: Please contact the author for data availability.

Voluntary accounting changes and post-earnings announcement drift

Purpose– The purpose of this paper is to investigate the relation between voluntary accounting changes (VACs) and post-earnings announcement drift. In addition, the authors examine how accounting choice heterogeneity moderates such association.Design/methodology/approach– The authors collect VAC firms in the US in the period from 1994 to 2008 and identify the heterogeneity of accounting choices between VAC and non-VAC firms. To test the hypotheses, the authors consider a 10-Q filing window and a post-filing drift window. The 10-Q filing window begins from one trading day before and ends on one trading day after the quarterly report filing date. The post-filing drift window begins from two trading days after the filing date and ends on 60 trading days with respect to the earnings announcement date.Findings– The results demonstrate that, overall, VAC does not affect the three-day market reactions to 10-Q filings. However, after taking into account the accounting choice heterogeneity, the authors observe that VAC is positively related to the market reactions to surprises and negatively associated with the post-filing period drift.Originality/value– The paper contributes to the literature by showing that VACs affect the market’s responses to 10-Q filings only when such change results in different accounting practices compared to the VAC firm’s major competitors. Furthermore, given the change with heterogeneity requires more time to process, VACs are related to post-filing announcement drift.

The Association between XBRL Adoption and Market Reactions to Earnings Surprises

ABSTRACTThis paper investigates whether the adoption of XBRL is associated with market reactions to earnings surprises around 10-Q and 10-K filing dates based on a sample of XBRL filers in all three phases. Our main findings demonstrate that the adoption of XBRL is positively associated with market reactions to earnings surprises around 10-Q and 10-K filing dates only for Phase II, not for Phase I, filers except when a Phase I filer is followed by fewer analysts. The full-sample test shows that the hypothesized effect also exists for Phase III filers, and we observe an increase in market reaction for Phase II filers after their second year of adoption. We believe this study has policy implications and may alleviate firms' concerns regarding the benefits of adopting XBRL.JEL Classifications: M41.Data Availability: All data are publicly available.

Insiders’ incentives of using a specific disclosure tone when trading

This study investigates the relations between disclosure tone, insider trading and returns. Using a dictionary-based approach to quantify the disclosure tone contained in the Management Discussion and Analysis of 10-Q and 10-K filings, I find that the net disclosure tone predicts the insider purchase ratio (purchases scaled by the sum of purchases and sales), even after controlling for past purchases, return volatility and firm characteristics. Constructing a buy-and-hold portfolio over a six months horizon, I find that insiders earn approximately 5.8% abnormal return per year. Both disclosure tone and insider purchase ratio are able to predict the buy-and-hold abnormal return.

The Debt Market Relevance of Disclosure Tone: Evidence from the Pricing of Credit Default Swaps

This paper examines whether corporate disclosure tone conveys credit risk-relevant information to the credit default swaps (CDS) market. Using a large sample of the Securities and Exchange Commission (SEC) 10-K and 10-Q filings, I find that the change in CDS spreads over the three-day window surrounding the SEC filing date is positively associated with the pessimism of the language used in the 10-K or 10-Q filing. Consistent with nonlinear payoff functions for creditors, this association is more pronounced for reference entities with speculative credit ratings. These findings indicate that the tone of periodic SEC filings is useful for CDS investors to evaluate the reference entity’s credit risk. In addition, I find stronger reaction of CDS spreads to disclosure tone when the CDS contract has shorter maturity, equity short sellers are more active, or the reference entity has lower visibility (i.e., smaller size or lower analyst coverage). Overall, these results support the view that disclosure tone has information content for investors in the CDS market in particular and the debt market in general.

Market Reaction to Quantitative and Qualitative Order Backlog Disclosures

Findings in the prior literature on the implications of Order Backlog (OB) for stock returns are both sparse and inconclusive. For example, Rajgopal et al. (2003) show that firms with larger ratios of OB to total assets earn lower subsequent returns than firms with smaller ratios; while Lev and Thiagarajan (1993) find that increases in OB beyond sales increases are positively associated with returns. We provide evidence that quantitative information on increases in OB, coupled with positive qualitative indications by management about the direction of OB, are associated with higher returns; and that there is incremental information content to OB related disclosures over and above earnings surprises. We find this to be the case for annual and quarterly OB disclosures, regardless of whether they are provided in the preliminary earnings releases or in the SEC Form 10-Q (K) filings.

Labor Unemployment Concern and Corporate Discretionary Disclosure

We investigate how firms strategically vary their disclosure policies in response to labor unemployment concern. Using changes in state unemployment insurance laws as exogenous variations of labor unemployment concern, we show that firms provide more bad news forecasts when unemployment concern is low. This relation is stronger when firms are financially constrained, when CEOs and CFOs have higher equity incentives, and when workers are likely to be affected more by unemployment. Our findings are not driven by earnings management reversal or underlying performance changes, and are robust to a battery of identification tests. Finally, we find a similar effect of unemployment concerns on disclosure using the tone of 10-K and 10-Q filings as an alternative proxy for corporate disclosure. Overall, our findings suggest that labor unemployment concern is an important consideration for corporate discretionary disclosure.

Factors associated with price reactions and analysts’ forecast revisions around SEC filings

We investigate the extent to which rapid accessibility of financial reports filed electronically through the Securities and Exchange Commission’s EDGAR system has affected the ability of investors and security analysts to use accounting data in pricing decisions and forecasting. Consistent with prior research, we find evidence confirming that stock price reactions to SEC filings are significant in the EDGAR period but not the pre-EDGAR period. We also find significant revisions in analysts’ one-quarter-ahead earnings forecasts around SEC filings dates in both the pre-EDGAR and EDGAR periods. The price and forecast revision evidence indicates that financial analysts have used SEC filings all along. However, it is the advent of EDGAR that has allowed individual investors to also use 10-K and 10-Q filings. Cross-sectional analyses indicate that in the EDGAR period, trading volume around the preceding earnings announcements may influence individual investors to react to SEC filings. In contrast, variables such as the earnings surprise and the level of total accruals attract the attention of financial analysts. Interestingly, analysts appear to have been less likely in the pre-EDGAR period to bear the cost of searching out each SEC filing to identify those with large total accruals, which are known only after examining the SEC filing itself.

How Do Investors Interpret Announcements of Earnings Delays?

Unlike in the case of delays of 10‐K or 10‐Q filings, the SEC does not require managers to disclose delays of earnings announcements to the public. Thus, for companies that are unable to report earnings by their expected date, managers face a decision: remain silent or announce the delay. Prior research has investigated all earnings delays, whether or not they are accompanied by announcements of the delay announcement, and found that the market reaction is slightly negative, on average, for companies that allow their expected earnings dates to pass without disclosing results. It's not clear, however, whether this negative reaction was due to the absence of news or to the information contained in the announcements of the earnings delays.The authors' recent study documents that earnings delay announcements are associated with an average one‐day abnormal stock return of a negative 6%. This statistically as well as economically significant reduction in value is consistent with anecdotal evidence in the popular business press as well as predictions of disclosure theories, in particular the explanation that concerns about legal liability and managerial reputation motivate managers to disclose bad news. The study also shows that almost all managers who announce earnings delays attempt to influence the market reaction by disclosing the underlying cause. Finally, the study shows that the market reaction to earnings delay announcements is positively related to future earnings changes, consistent with the role of these disclosures in providing a signal of deteriorating financial performance.

The Effect of First Wave Mandatory XBRL Reporting across the Financial Information Environment

ABSTRACTThis study examines the effect of mandatory XBRL disclosure across various aspects of the financial information environment. Our findings show an increase in information efficiency, a decrease in event return volatility, and a reduction of change in stock returns volatility for 428 firms (1,536 10-K and 10-Q filings) post-XBRL disclosure. In addition, this study shows that XBRL mitigates information risk in the market, especially when there is increased uncertainty in the information environment. Our results are robust to various alternative specifications and research modifications, such as a matched-pair control (326 XBRL versus 326 non-XBRL firms), current stock market condition, potential earnings releases, and corporate governance. This study contributes to the literature by systematically documenting evidence of how mandatory XBRL disclosure decreases information risk and information asymmetry in both general and uncertain information environments. Our evidence could potentially assist the SEC in their effort to expeditiously assess the benefits of XBRL.Data Availability: The list of firms used in the study is available from Professor Lim upon request. All other data are available from sources identified in the body of the paper.

Capital Market Consequences of Filing Late 10-Qs and 10-Ks

We find that the market reacts negatively to announcements that firms will file late 10-Qs or 10-Ks, and that the reaction is more negative for late 10-Qs than late 10-Ks. We also find that the larger reaction to late 10-Q announcements is due to firms that report accounting reasons as the cause of the delay. In addition, we find that the market anticipates which late 10-Q filers will subsequently fail to file within the SEC’s allowed grace period, but only when accounting reasons explain the delay. Finally, we find that abnormal returns continue to decline during the months following the late filing announcement, except when accounting reasons explain the delay. Our study contributes to the literature by finding that late filings have important capital market consequences and that late 10-Q filings have distinct valuation implications compared with late 10-K filings. Importantly, we also show that accounting information included in Form NT plays a critical role in how market participants interpret the valuation implications of late filings.

How Important are Earnings Announcements as an Information Source?

In a competitive information market, a single information source can only dominate other sources individually, not collectively. We explore whether earnings announcements constitute such a dominant source using Ball and Shivakumar's (2008) [How much new information is there in earnings?, Journal of Accounting Research, 2008, 46(5), pp. 975–1016] R 2 metric: the proportion of the variation in annual returns explained by the four quarterly earnings announcement returns. We find that the earnings announcement days' R 2 is 11% – higher than the corresponding R 2 of days with dividend announcements, management forecasts, preannouncements, and 10-K and 10-Q filings and their amendments, and comparable to that of the four days with the largest realised absolute returns in a year. Additional analysis reveals that earnings announcements convey extreme bad news as often as management forecasts and preannouncements; for any other type of news, earnings announcements are much more frequent. We conclude that earnings announcements are an important source of new information in the equity market.

How Important are Earnings Announcements as an Information Source?

In a competitive information market, a single information source can only dominate other sources individually, not collectively. We explore whether earnings announcements constitute such a dominant source using Ball and Shivakumar’s (2008) R2 metric: the proportion of the variation in annual returns explained by the four quarterly earnings announcement returns. We find that the earnings announcement days’ R2 is 11 percent — higher than the corresponding R2 of days with dividend announcements, management forecasts, preannouncements, 10-K and 10-Q filings, and their amendments, and comparable to that of the four days with largest realized absolute return in a year. Additional analysis reveals that earnings announcements convey extreme bad news as often as management forecasts and preannouncements; for any other type of news earnings announcements are much more frequent. We conclude that earnings announcements are an important source of new information in the equity market.

Recent Trends in Audit Report and Earnings Announcement Lags

SYNOPSIS: The Securities and Exchange Commission introduced accelerated filing requirements for corporate 10-K and 10-Q filings in 2003. The major accounting firms and some companies expressed concerns about the acceleration, arguing that other changes in financial reporting and disclosure requirements, corporate governance, and auditing standards would make it difficult to meet the shorter deadlines while maintaining good quality reporting. Using longitudinal samples of companies for the period 2001–2006, we examine two lags in the corporate reporting process: the audit report lag (the number of days between the fiscal year-end and the audit report date), and the earnings announcement lag (the number of days between the fiscal year-end and the earnings announcement date). Our results indicate that both lags increased significantly in the two-year period 2001–2002 prior to the introduction of the accelerated filing requirements and in the period 2003–2006 when the new filing requirements were in effect. Furthermore, when we examine the sample of companies for which both the audit lag and earnings announcement lags are available, we find that the likelihood that companies announced earnings prior to the audit report date increased considerably over the period 2001–2006, but particularly during 2004–2006 when Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) was in effect. Thus it appears that an unintended consequence of recent policy changes is that companies are less likely to wait for completion of their audits to announce earnings. We also examine the quality of reporting (measured by absolute discretionary accruals and quality of accruals) for the sample period. We find that long audit report lags (or 10-K filings lags) were not associated with lower quality of earnings or accruals (except for a mild effect in 2004), providing no support for the concern that companies that have to rush to meet the deadlines may suffer a loss of reporting quality. However, when we examine potential reporting quality effects of early earnings announcements, we find some mild evidence that for those companies that made earnings announcements several days in advance of completion of their audits, the quality of earnings/accruals was lower in some years during the period 2003–2006.

Recent Trends in Audit Report and Earnings Announcement Lags

The Securities and Exchange Commission introduced accelerated filing requirements for corporate 10-K and 10-Q filings in 2003. The major accounting firms and some companies expressed concerns about the acceleration, arguing that other changes in financial reporting and disclosure requirements, corporate governance, and auditing standards, would make it difficult to meet the shorter deadlines while maintaining good quality reporting. Using longitudinal samples of companies for the period 2001-2006, we examine two lags in the corporate reporting process: the audit report lag (the number of days between the fiscal year end and the audit report date), and the earnings announcement lag (the number of days between the fiscal year end and the earnings announcement date). Our results indicate that both lags increased significantly in the two-year period 2001-2002 prior to the introduction of the accelerated filing requirements and in the period 2003-2006 when the new filing requirements were in effect. Further, when we examine the sample of companies for which both the audit lag and earnings announcement lags are available, we find that the likelihood that companies announced earnings prior to the audit report date increased considerably over the period 2001-2006, but particularly during 2004-2006 when Section 404 of the Sarbanes-Oxley Act was in effect. Thus it appears that an unintended consequence of recent policy changes is that companies are less likely to wait for completion of their audits to announce earnings. We also examine the quality of reporting (measured by absolute discretionary accruals and quality of accruals) for the sample period. We find that long audit report lags (or 10-K filings lags) were not associated with lower quality of earnings or accruals (except for a mild effect in 2004), providing no support for the concern that companies that have to rush to meet the deadlines may suffer a loss of reporting quality. However, when we examine potential reporting quality effects of early earnings announcements, we find some mild evidence that for those companies that made earnings announcements several days in advance of completion of their audits, the quality of earnings/accruals was lower during some years during the period 2003-2006.

The Determinants and Information Content of the Forward-looking Statements in Corporate Filings - A Naive Bayesian Machine Learning Approach

This paper examines the tone and content of the forward-looking statements (FLS) in corporate 10-K and 10-Q filings using a Naive Bayesian machine learning algorithm. I first manually categorize 30,000 sentences of randomly selected FLS extracted from the MDA and (2) content (i.e., profitability, operations, and liquidity etc.). These manually coded sentences are then used as training data in a Naive Bayesian machine learning algorithm to classify the tone and content of about 13 million forward-looking statements from more than 140,000 corporate 10-K and 10-Q MD&As between 1994 and 2007. I find that firms with better current performance, lower accruals, smaller size, lower market-to-book ratio, and less return volatility tend to have more positive forward-looking statements in MD&As. The average tone of the forward-looking statements in a firm's MD&A is positively associated with future earnings and liquidity, even after controlling for other determinants of future performance and there is no systematic change in the information content of MD&As over time. Finally, the evidence indicates that financial analysts do not fully understand the information content of the MD&As in making their forecasts.

The Effect of Enhanced Disclosure on Open Market Stock Repurchases

Publicly traded companies distribute cash to shareholders primarily in two ways - either through dividends or through anonymous repurchases of the companies' own stock on the open market. Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. Scholars and regulators became concerned that such announcements might be used by insiders to exploit public investors. To increase transparency and reduce opportunities for exploitive behavior, the SEC required that companies disclose their repurchase activity for the past quarter in their 10-Q and 10-K filings beginning in January 2004. This paper tracks the 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.

Corporate Tax Reserves, Firm Value, and Leverage

New accounting rule FIN 48 compels public corporations to disclose how much money they have reserved for financial reporting purposes in order to pay the U.S. and foreign governments in the event that tax-saving transactions are successfully challenged by the IRS and other taxing authorities. Tests using a sample of 273 industrial firms whose 2007:I 10-Q filings adhered to the new reporting requirement indicate that the amount of reserves is a significantly positive determinant of firm value regardless of endogeneity control. Profitable high-reserve firms both reduced their reserve levels and significantly increased their leverage from 2005 to 2007, suggesting tax-sheltering activities being displaced by more debt utilization prior to the mandatory FIN 48 reporting. This result complements Graham and Tucker (2006) who report that tax sheltering appears to be a significant determinant of corporate debt utilization.

Voluntary disclosure of accruals in earnings press releases and the pricing of accruals

This study investigates firms’ decisions to disclose accruals information in earnings press releases versus to provide it only in 10-Q filings and the impact of this disclosure on the pricing of accruals. I find that firms disclose accruals in their press releases when earnings alone are a weak indication of cash flow performance and that following these disclosures the accruals information is fully impounded into stock prices. The evidence suggests that when investor demand for accruals is likely to exist and firms disclose the information in earnings press releases, the mispricing typically associated with accruals is mitigated.