Research Highlights

Late Financial Filings Come at a Cost

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Investors are able to see through management assertions that turn out to be false.
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.
In "SEC Filings, Regulatory Deadlines, and Capital Market Consequences," NYU Stern Accounting Professor Eli Bartov and co-author Yaniv Konchitchki of University of California, Berkeley, studied data on 2,115 firms over a nine-year period and found that company stock prices dropped significantly as soon as firms filed Form NT with the SEC. The NT form allows companies a several-day grace period for quarterly statements (10-Qs) and annual statements (10-Ks). The authors also found that the price decline can continue for months, even if the firms meet the extended filing deadline.
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.