Bad earnings? It sounds much worse on a Friday
Mar, 2010
By Leon Zolotoy
Senior lecturer - Finance
PhD, Mphil (Tilburg), MA (summa cum laude)(BGU),BA(summa cum laude)(BGU)
Common wisdom is to announce bad earnings on Friday, but new research proves that doing this, weakens your stock price even further.
A tip to board members-if you have bad earnings to announce, release them on any other day of the week but Friday.
Melbourne Business School research has found that investors view bad earnings announcements made on Friday, far more negatively than the same announcement made on any other day of the week.
Investors have learned that firms report "bad" news on Fridays, so they now consider any negative earnings announcements released on Fridays as particularly important ones which firms are attempting to hide.
In light of this research, "bad" news should be shifted from Friday to some other trading day.
My research evaluated two issues. First, was the strategy of reporting "bad" news on Friday persistent over time? And if so, did the investors learn about this strategy and how was it reflected in the earnings-returns relation?
Results show that from 1989 to 2006, firms systematically reported more bad news on Fridays compared to other trading days. Also, in the late 1980s and early 1990s, the impact of Friday earnings on stock returns was weaker than during the rest of the week.
This trend was reversed during the last ten years with stock returns becoming more sensitive to Friday announcements.
More specifically, there is a reversal in the "Friday effect" in the earnings-returns relation with stock prices becoming eventually more sensitive to Friday earnings announcements. Interestingly, the reversal appears to be substantially more pronounced when ‘bad' news is released.
In other words, bad news is viewed far more negatively than it needs to be if it is released on a Friday.
Since stock prices became more sensitive to Friday announcements, the strategy of reporting "bad" news on Friday misses its target.
Over time investors have learned about the tendency of the firms to release "bad" news on Fridays. Our findings suggest that for the last ten years investors have systematically overreacted to the "bad" earnings announcements released on Fridays, compared to their response to the "bad" news released during other trading days.
A further complication to this trend is that if analysts have variety of expectations-for example, some think the news will be bad, others don't know-there will be an even greater negative Friday effect, regardless of the announcement's content.
The way to overcome this? Change your announcement to Monday, or Tuesday, or Wednesday or even Thursday, but save Friday for after-work drinks.
Leon Zolotoy's research is in the area of empirical finance and accounting, in particular asset pricing and informational market efficiency. In addition to completing his PhD at Tilburg University, Leon spent some time as a visiting PhD student at Stern School of Business, NYU. Leon teaches financial management at Melbourne Business School.
