Investors and journalists have long complained that companies release bad news—a failed product trial, a recall, a Securities and Exchange Commission investigation—on Fridays, particularly after the market closes. The Friday release is a transparent attempt to evade fallout by burying bad news ahead of the weekend.
Now at last comes proof that the Friday strategy doesn't work. In this paper, Stefano DellaVigna of the University of California at Berkeley and Joshua Pollet of the University of Illinois at Urbana-Champaign * found that by releasing bad earnings news on Friday, companies can fool the markets for a day or two. But over time, they conclude, investors factor the disappointing information into the stock price.
DellaVigna and Pollet examined more than 100,000 earnings releases between January 1995 and June 2003, and the results of trading in the first days after the announcements. They found that first-day market reaction is muted by 60 percent when investors have the weekend to digest—or to forget about—earnings announcements. The dynamic works on the flip side as well. Says DellaVigna: "If you release good news on Friday, you get less of a positive kick on Monday."
You might assume that companies would choose to release poor earnings on Fridays. And the assumption appears to be correct, based on DellaVigna and Pollet's reading of the data. They conclude that "Friday announcements are 20 percent more likely to present negative earnings than announcements on other weekdays." What's more, Friday earnings announcements "are about 50 percent more likely to fail to meet analyst expectations."
After muddling through back-to-work Monday, however, investors do ultimately figure out that the company turned in a stinker of a quarter. When they examined action in stocks in the period between three and 75 days after earnings announcements, DellaVigna and Pollet found significantly greater volatility among stocks of companies that announced on Fridays. Investors may react sluggishly at first, but they compensate over the long term. In the end, it's a wash. In other words, trying to trick investors by discreetly emitting bad news on a Friday is pointless. "This suggests that over the long run there is no permanent effect of choosing to announce earnings on Friday."
The findings beg two questions. First, why do investors fail to properly incorporate Friday data into their Monday trading? And second, why do companies persist in trying to sneak poor earnings past investors? The answer to both lies in America's chronic culture of short-term thinking.
Clearly, professional and amateur investors get distracted over the weekend. Liberated from their desks (and their desktops) they suddenly unplug from the enthralling world of p/e ratios and 52-week moving averages. On Saturdays and Sundays, CNBC switches to pay-per-view exercise gizmo ads, and the Wall Street Journal goes on hiatus. Investors are more likely to spend their time watching football, ferrying kids to soccer games, shopping, or playing golf than watching stock prices. Perhaps they might notice a headline about an earnings announcement in the Saturday paper. But by the time Monday morning rolls around, they forget about it. "The most likely explanation of the facts is that the weekend disrupts the short-term memory of investors," says DellaVigna. (DellaVigna, incidentally, says he's now looking into how the Friday phenomenon plays out in politics, although coming up with ways to quantify policy/political disappointments and the "investor" reaction to them might be challenging.)
Why do companies try to bury the news on Friday? Whether you're a press aide to a senator or an investor relations official, there's a natural psychological tendency to take steps to ensure that good news is trumpeted loudly while bad news is whispered sotto voce.In addition, when things are going poorly at a company, executives tend to focus on strategies that will get them through the next few days, the next quarter, and the next year—in that order. If that means buying a few days' reprieve with a Friday release, they'll do it. For embattled companies with poor results, earnings announcements represent occasions for columnists to rant about management, for analysts to downgrade stocks, and for investors to dump shares indiscriminately. Each is painful. And each can be avoided (a little bit) by parceling out bad news on Friday.
Does this mean that investors should automatically be leery of companies that announce earnings on Fridays? Not necessarily. Many companies announce earnings a fixed number of business days after the quarter formally ends, regardless of which weekday it falls on. Ford on this Friday morning announced better-than-expected earnings. The ones to look out for are those that surreptitiously switch the date of an earnings announcement to Friday, or that offer an unscheduled update on the last day of the work week. And beware of anybody who releases significant news after the market closes on Friday afternoon. Companies that choose to share new data while brokers are rushing off to happy hour usually make investors sad.
Correctio n, Sept. 20, 2004: The article originally referred to referred to Joshua Pollet as a professor at the University of Illinois at Chicago. In fact, he is a professor at the University of Illinois at Urbana-Champaign. (Return to corrected sentence.)