Companies hide negative news by issuing unrelated press releases alongside SEC filings, study shows

To distract investors from bad news, companies strategically issue unrelated press releases on the same day they file negative news with the SEC via Form 8-K, according to a new study from the University of Notre Dame.

Form 8-K is the report publicly traded companies must file with the SEC between quarterly reports to notify shareholders of any major events. Sometimes the news is positive, sometimes it’s negative.

Jessica Watkins

The study examined close to 50,000 non-earnings-related 8-K filings between 2005 and 2018, where the firm also issued a news release on the same day. It found that, alongside 8-K reports featuring negative news, managers tend to push out simpler, unrelated press releases to divert attention from the harder-to-read regulatory filings.

“Managers’ Strategic Use of Concurrent Disclosure: Evidence from 8-K Filings and Press Releases” is forthcoming in The Accounting Review from Jessica Watkins, assistant professor of accountancy in Notre Dame’s Mendoza College of Business, along with Caleb Rawson from the University of Arkansas and Brady Twedt of the University of Oregon.

“Consistent with our prediction, we find that managers disclosing negative news via SEC Form 8-K are more likely to issue a concurrent press release about an unrelated event when compared to managers disclosing positive or neutral news,” Watkins said. “We also find that managers more commonly issue concurrent unrelated press releases when they have stronger incentives to divert investors’ attention away from 8-Ks disclosing negative news, including when they have an upcoming stock sale.”

Overall, about 40 percent of the 8-Ks examined in the study conveyed negative news and 33 percent were accompanied by a same-day, unrelated press release. The team shows that managers are more likely to file 8-Ks with negative news during periods with low investor attention, typically on Fridays or after-market hours.

This behavior slows how quickly the market incorporates the information into the company’s stock price and results in fewer people reading the 8-K filing.

The study highlights 8-K filings from Netgear Inc. and Nuance Communications Inc. as examples of how related and unrelated news releases are used in practice.

In 2011, Netgear Inc. filed an 8-K indicating it had selected a new board member. The same day, Netgear issued a news release that provided further detail concerning the appointment and the candidate’s qualifications for the position.

In contrast, Nuance Communications Inc. in 2017 filed an 8-K disclosing it had terminated the employment of an executive vice president. Nuance also issued a news release that day, but this release was about receiving an award from an industry-specific magazine.

The team concludes that Netgear’s news release elaborates on the 8-K filing and appears intended to help investors better understand the 8-K information. The Nuance release, however, was unrelated and presumably issued with the intent to distract investors from the negative information.

“We find it surprising this behavior is so effective,” Watkins said. “Investors should not assume press releases cover all events happening at a company at a given time.”