Got bad news? It pays to relegate it in a footnote of the press release.
Companies that are forthright about bad news end up paying for it more than those that bury it in the press release, a new study of accounting restatement announcements by companies shows, leading its authors to suggest regulators should standardize such disclosures.
“Firms providing less prominent press-release disclosure of a restatement are rewarded with a less negative return at the announcement,” the report said.
Such companies are also less likely to be sued for securities fraud, according to the report by Edward Swanson and Senyo Tse of the Mays Business School at Texas A&M University and Rebecca Files of the University of Texas, Dallas.
The study, “Stealth Disclosure of Accounting Restatements” in the September issue of the Accounting Review, used a General Accounting Office database of companies that announced accounting restatements based on serious irregularities from January 1997 through June 2002.
It found that companies that announced a restatement in the headline of a press release suffered a drop of 8.3 percent relative to the stock market as a whole over the three days around the news.
This compared with a drop of only 4 percent for companies that revealed the restatement in the body of a press release about earnings, and only 1.5 percent for companies that relegated the news to a footnote in a release about earnings.
Of 381 firms in the study’s final sample, 157 made disclosures in the headline, 189 in the body and 35 in footnotes.
The market made up for most of the difference between the first two cases in the 20 days following the announcement, but it does not make up for other economic consequences, the report said.
Reducing the prominence of the disclosure by one level, cuts the odds of a lawsuit by about half, it said.
“Prominent misstatement disclosure results in a greater price decline … and makes it easier to link the decline directly to management actions,” the report added.
(Reporting by Paritosh Bansal; editing by Andre Grenon)
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