Investors, hedge funds, regulators, banks, and attorneys want to know: What really happens when a company misses a regulatory deadline? In a new paper, we offer theory and quantitative analysis of the consequences of missing U.S. Securities and Exchange Commission (SEC) regulatory deadlines for filing quarterly (Form 10-Q) and annual (Form 10-K) financial statements. Timely disclosure of financial statement information is a critical requirement for firms and well-functioning capital markets. Late filings delay disclosures that help investors make informed investment decisions and, as a result, increase information asymmetry and trading costs. Late filings may also trigger costly regulatory penalties and covenant violations.
Companies that fail to file a Form 10-Q or 10-K on time are required by SEC Rule 12b-25 to file a Form NT (for “Non-Timely,” also known as Form 12b-25) no later than one day after the due date. Timely filing of Form NT results in an automatic one-time grace period of five days for 10-Qs and 15 days for 10-Ks. Form NT also requires management to explain the reason for the late filing and declare whether it expects to subsequently file within the allowed grace period. Companies that file Form NT on time and subsequently file within the allowed grace period are considered by the SEC to have complied with rules and avoid SEC-imposed penalties.[1] Conversely, companies that fail to file within the allowed grace period are subject to a variety of costly penalties, including deregistration by the SEC, delisting by stock exchanges, the inability to raise capital through issuance of public securities, and potential debt covenant violations.[2]
We study the capital market consequences of late filings by examining and contrasting the immediate and future market consequences of late 10-Q and 10-K filing announcements. We pose three questions. The first asks what the stock price reaction is to the NT filings that announce the late filing of the 10-Q or 10-K. Based on the preceding discussion, we expect a negative market response to NT filings in which management declares the filing will occur beyond the grace period. It is less predictable, however, whether investors will respond negatively to NT filings in which management declares the filing will occur within the grace period. Because the SEC considers these filings to be timely, they impose no obvious costs on shareholders and hence may generate no market response.[3] Nevertheless, it is possible that investors may infer negative news simply from the fact that the firm did not meet its original filing deadline, in which case investors may react negatively. Further, because our sample is dominated by NTs that declare that the firm will file within the grace period (86 percent of our sample), if there is no reaction to the filings, we may also observe no response for our sample as a whole.
The second research question asks whether investors react differently to late quarterly filings than to late annual filings. Shareholders may react differently to late quarterly than to late annual filings because quarterly financial statements require less disclosure and are unaudited. However, it is not clear whether the reaction to late quarterly filings is smaller or larger than the reaction to late annual filings. On one hand, less disclosure in quarterly financial statements may lead to a smaller reaction to NT 10-Qs than to NT 10-Ks because less information is being withheld from the market. On the other hand, because quarterly filings are much less onerous to produce than annual filings, late quarterly filings may signal more serious underlying problems than late annual filings, suggesting a stronger negative reaction to NT 10-Qs than to NT 10-Ks.
The third research question asks whether the immediate market reaction to the NT filing is complete and whether its completeness depends on the reason for the delay. Given that late filings are relatively rare and may occur for a variety of unusual reasons, market participants may have difficulty determining how they affect firm value and may be better at interpreting the consequences of some reasons than others.
We perform our analysis on a sample of 2,115 first-time late filers. We begin by documenting several factors that are new to the literature. Specifically, we document that accounting problems are the most frequently cited reason for filing delays. Furthermore, the average delay for both 10-Qs and 10-Ks is more than three times longer when accounting reasons are cited (41 days) than when corporate events (such as employee turnover) explain the delay (13 days) or when managers provide reasons that are uncertain (11 days). Finally, we find that management is more than twice as likely to miss the grace period deadline for late 10-Qs (51 percent of the time) than for late 10-Ks (25 percent of the time).
We address the first research question by examining short-window stock price changes around the NT filing dates. Our analysis of the entire sample finds a significantly negative stock price reaction to both NT 10-Q filings (–2.93 percent) and NT 10-K filings (–1.96 percent). Our analysis of the subsample of NT filers that declare their intentions to ultimately file within the grace period also finds a significantly negative stock price reaction. Moreover, we find a significantly larger negative reaction to NT filers that subsequently failed to file within the grace period when compared to firms that meet the deadline. Critically, we find this result regardless of whether the NT filing includes management’s declared intention to subsequently file within the grace period. This explains why investors respond negatively even to the subset of late filers that declare they will file within the grace period and suggests that investors are able to see through management assertions that turn out to be false. We further find evidence suggesting that when accounting reasons are cited for the delay, investors infer that quarterly filings signal deeper underlying problems that ultimately prevent management from meeting the grace period deadline. Overall, the results from answering our first question suggest that investors do not take managements’ announcements at face value and instead appear to use other information to infer the accuracy of managements’ announcements.
In answer to our second research question, we find a significantly larger negative reaction to filing an NT 10-Q (i.e., filing the form indicating a late 10-Q) than to filing an NT 10-K (i.e., filing the form indicating a late 10-K). In addition, we find that firms reporting accounting reasons for the delay drive the larger negative reaction to the NT 10-Q filings. This indicates that investors perceive accounting problems that prevent timely 10-Q filings as costlier than accounting problems that delay 10-Ks, perhaps because 10-Qs are unaudited and less burdensome to prepare, as they require significantly less disclosure.
In answer to our third question, we investigate whether the immediate stock market response is complete by examining stock price changes during the year following the NT filings. We find that, on average, abnormal returns for both NT 10-Q and NT 10-K filers continue to drift downward during the post-filing months. However, this drift is less pronounced when accounting reasons underlie the delay, suggesting that at the time of the late filing announcements investors are better able to interpret the effect of those announcements on firm value.[4] In addition, we find that both quarterly and annual late filers have poor operating performance, as measured by return on assets (ROA), during the five fiscal quarters centered on the NT filing quarter. This is consistent with the late NT filings’ signaling that past poor performance is expected to continue. This suggests that the market responds negatively to the NT filings because they convey news about deeper underlying problems. Together, these findings are consistent with the negative market response to the NT announcements being at least partially due to the NT filings conveying information about deeper problems, including poor future operating performance, and not simply due to the firm missing an SEC filing deadline.
In summary, our primary findings indicate that (a) delayed quarterly filings have distinctly different effects on firm value than do delayed annual filings, (b) investors do not accept at face value management assertions about the expected filing date, (c) accounting problems play a unique role in communicating the seriousness of the delay, and (d) delayed announcements tend to be followed by continued poor operating and stock price performance.
Our analyses and findings may offer attorneys, market participants, and a company’s officers useful information. For example, the evidence that investors are able to see through management’s inaccurate assertions about the the expected filing date casts doubt on the wisdom of making those assertions. These findings may also be useful to investors and attorneys as prima facie evidence of an intentionally misleading disclosure. Finally, our findings of significant and prolonged negative operating and stock price performance of late filers may inform investors about the long run prospects of these firms.
ENDNOTES
[1] However, during the grace period, companies are not allowed to register securities that rely upon the late statements until they are ultimately filed.
[2] Other adverse consequences include the inability to hold an annual shareholder meeting until the 10-K is filed. We note, however, that the most costly penalties are typically imposed only in the most egregious cases. For example, SEC administrative proceedings are usually reserved for issuers who are excessively late; and stock exchange delisting procedures are typically not triggered until the company is at least six months late in its filing. However, some penalties are effectively imposed immediately upon expiration of the grace period. Specifically, companies who miss the grace period are not eligible to issue securities using Form S-3 (referred to as “shelf registration”) until they have filed in a timely manner for at least 12 months. This imposes costs by limiting a company’s ability to raise capital on a timely basis. Covenant violations are also a potential cost that would be immediately incurred.
[3] We acknowledge, however, that late filings, even when filed within the grace period, extend the duration of the information asymmetry between managers and shareholders. However, because the grace period only extends the duration by five to 15 days, we do not expect such delays to be very costly.
[4] For completeness, we also examine the stock market reaction to the subsequent actual filling of the late 10-Ks and 10-Qs. This analysis finds a significant negative market reaction to the subsequent filings, consistent with an incomplete reaction during the NT filing event window.
This post comes to us from Professor Eli Bartov at NYU’s Stern School of Business and Professor Yaniv Konchitchki at University of California, Berkeley’s Haas School of Business. It is based on their recent paper, “SEC Filings, Regulatory Deadlines, and Capital Market Consequences,” forthcoming in Accounting Horizons and available here.