If companies ran Christmas the way they run their earnings announcements, Santa Claus would usually come early, but when he is late, watch out!
What’s more, it looks like if you as an investor pay close attention to companies which bring forward or delay earnings releases, you might just be able to front run or fade Santa.
“Calendar revisions should be treated as significant sources of information ahead of the actual announcements,” according to Eric So of the Massachusetts Institute of Technology’s Sloan School of Management, who authored a new study about what happens to stocks when companies move their earnings day.
The study found not only a strong relationship between companies advancing or delaying their earnings announcements and how good the news turned out to be, but also between that and subsequent stock performance.
Unlike Christmas, corporate earnings days are a moveable feast, and how executives decide to schedule them turns out to be a strong leading indicator.
Between 2006 and 2013 there were 18,959 instances when firms made calendar changes to previously scheduled announcements at least two weeks before the planned event.
Obviously, these changes are divided between when firms move up earnings announcements, and when they move them back. I’ll spare you the detail, but the author devised a scoring system which weighted announcement changes based on how far forward or backward companies were pushing their news.
As you might expect, executives like to move forward good news and, perhaps in hopes of rescue, like to delay the bad. Companies with advanced earnings showed greater return on assets (ROA), same-quarter growth in ROA and better analyst-based earnings surprises, as compared to the delayers.
While various theories have been put forward to explain this phenomenon, maybe the best one is that it is human nature to want the good to happen quickly and to delay the less good, or bad. By extension, it seems likely that there is more re-checking of figures by taxpayers who’ve calculated they owe unexpectedly more, while the big refunds probably find their way more quickly into the mailbox.
One hint does come from the fact that among companies where the managers “face greater career concerns” the results are even stronger, suggesting that insiders use their superior knowledge to protect and advance their own interests.
Play it as it lays
The most interesting part of the research is that, despite all of this being so intuitive, investors really don’t fully react to expectations that a move forward in an announcement is good and a delay a harbinger of the bad.
Shares of advancers, those which move dates forward, outperform delayers by 2.60 percentage points in the month after calendar revisions are announced. Advancers beat the market by about 138bp during the month, while delayers underperform by 130bp.
Even more striking is how slow those moves, one way or another, are in coming. The cumulative outperformance of advancers over delayers is just 50bp two days before earnings day, but nearly doubles on the day the good or bad news comes out. One day later and the cumulative outperformance hits 200bp.
While the study makes no guesses, it seems likely to me that most professional investors are highly involved in the narratives they have constructed about the companies they invest in: what they expect to see in earnings, where the company and its shares are going. That makes following a naive strategy such as buying if they move news forward and selling if they delay a lot harder, especially given that the strategy is by definition a blind one.
Think of this as a career problem not just for company managers but for money managers. Money managers don’t market themselves as ‘arbitragers of the obvious’ for the rather simple reason that this is a difficult proposition to present as unique or worthy of high compensation. Far better to prattle on about your strong team of company analysts and your many and in-depth discussions with company management, or better yet something even more amorphous and harder to replicate.
So don’t expect the “Long/Short Good News/Bad News Fund” any time soon. Also don’t expect company managers to change, the common denominator being that both groups are human.
(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication, he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him atjamessaft@jamessaft.com)
