If you are a stock investor, then you have probably noticed that companies often delay their earnings release dates. While this is normal, the timing can be very important, especially in the case of small-cap companies, whose liquidity is typically lower. Regardless, you should always wait until the company’s results are officially released before making your investment decision.
Time will tell
Generally speaking, a company’s earnings announcement is a good indicator of its health. However, the timing of an earnings release can be a bit trickier. This is because companies have to weigh several factors, such as regulatory deadlines, competitors, analysts, and investors. If an earnings release is delayed, the impact can be felt for weeks or even months following the release.
One way to measure the impact of an earnings announcement is to compare its timing to the timing of other important events. For example, does the market pay attention to a company’s earnings drop on a popular reporting day?
A recent study published in the Journal of Accounting and Economics suggests that the timing of an earnings announcement might make a difference. Researchers examined the timing of about 120,000 results announcements made by more than 4,460 U.S. companies between 1989 and 2016.
It turns out that companies that move their earnings date ahead of the pack actually end up reporting better results. They also tend to experience higher share prices.
Investors are distracted
Studies have shown that investors are more apt to notice the finer points of a company’s financial performance when they aren’t distracted by a big earnings announcement. In fact, some researchers believe that delayed earnings reports may signal deteriorating financial performance. For this reason, you should take your time reading a company’s release.
There are many reasons why companies may choose to hold back their earnings, from theft to a fire. However, most firms are remarkably consistent when it comes to reporting their financial data. So, the timing of an earnings release has a lot to do with the quality of the numbers you’re about to see.
Researchers studied four hundred and forty-five US firms over the course of nineteen years. The authors studied the timing of a variety of metrics, including quarterly and annual earnings announcements. They found that the most pronounced differences occurred during the pre-open and post-close periods.
Small-cap companies have lower liquidity
Small-cap stocks are generally considered to be less liquid and more volatile than their larger counterparts. They are also more susceptible to earnings announcements and price movements.
Although small-cap companies are more prone to market ups and downs, many of them have excellent financial records. Additionally, these firms can be very competitive, as they typically focus on niche industries. This can make them ideal for growth.
Many small-cap stocks have been growing more than their large-cap counterparts in recent years. For example, the S&P SmallCap 600 Index has outperformed the S&P 500 Index in the past two years. But these outperformances are not necessarily indicative of the future.
Researchers have shown interest in exploring the factors affecting stock market liquidity. Studies have analyzed how regulatory policy announcements, company-specific factors, and trading systems affect liquidity. These studies have provided insights into how liquidity affects capital formation and expected returns.
Stock prices fluctuate more than post-close
The dotcom bubble fueled an IPO boom and subsequent stock price collapse, but it’s not all doom and gloom. As the author of an empirical study pointed out, a company’s valuation does not necessarily reflect its past performance. However, a solid understanding of earnings and the resulting volatility can help you decide whether to buy or sell.
One of the more interesting findings was the pre-open earnings announcement. Researchers compared the stock prices of companies that announced earnings before the market opened and compared it to those that announced them after the market closed. Their findings revealed that pre-open announcements had a much higher level of volatility than post-close announcements.
Interestingly, the aforementioned pre-open announcement was not the most popular of earnings announcements. In fact, researchers found that the pre-open winner accounted for only 5 percent of all earnings announcements.
RavenPack report highlights importance of timing
A new report by RavenPack highlights the importance of timing earnings releases. Its research shows that stocks respond to changes in the date that an earnings announcement is made. The study found that, on average, advancing the date correlates with good news on the report day, while delaying it correlates with bad news.
To address this issue, RavenPack developed an algorithm that would classify news items into a variety of different event categories. This algorithm would then determine whether or not an item was related to the issuer and whether it was relevant to the S&P Sector TR Index. Depending on the outcome, the event would then be assigned an Event Score.
In order to identify these events, the RPNA Algorithm would process the news items, and identify key words, phrases, and the role of the issuer. Depending on the outcome, the news item could be mapped into a “REVENUES” event category or a “NEWS” event category.