Late Financial Filings Come at a Cost
CFOs, take note: The wisdom of the crowds, or at least of sophisticated investors, results in protracted punishment for public companies that are late filers of financial statements, especially those that fail to file within a late-filing grace period, new research shows.
Investors are able to see through management assertions that turn out to be false.
Missing the late filing deadline, however, appears to be especially taboo. Firms that failed to meet the late filing deadline for the 10-Q were penalized especially harshly by the market. For instance, companies that filed for a late 10-Q and did so within the deadline averaged a five-day drop in share prices post-filing of slightly over 2 percent, while firms that promised to comply and then missed the deadline saw a drop of more than 4 percent over the same period. “[This] suggests that investors are able to see through management assertions that turn out to be false," the authors wrote.
The study also explored, among other patterns, how investors responded to management’s explanations for the late filings. In general, investors viewed 10-Q delays more worrisome than 10-K delays. The analysis revealed that delays in 10-Q filings evoked the greatest negative reaction when accounting reasons were cited, rather than, say, corporate events or CEO incapacity. The authors reasoned that because the quarterly statements are less onerous than the annual ones, the failure to file them in a timely fashion “may signal more serious underlying problems.”
The paper has been published in Accounting Horizons, published quarterly by the American Accounting Association.