SEC regulations require public firms to disclose any “material event” on a form 8-K filed within a certain time period. These events include earnings announcements, changes in an executive or director, changes in auditor and the issuance of new debt or equity. The news can be good or bad, and firms often issue press releases explaining the event.
We examine whether firms forced to disclose bad news issue press releases touting unrelated news around the time of the filing to distract investors. We study a broad sample of thousands of 8-K filings that are accompanied by press releases and find that, compared with firms whose filings contained positive or neutral information, firms disclosing negative information were 7 percent more likely to concurrently issue a press release featuring positive, unrelated news.
This result highlights how managers can be strategic about disseminating the information they want covered (and conversely, the information they do not). They make it easier and more convenient for journalists to get the information they want them to get, while potentially burying bad news about their firm. They know newswires can be easier to pay attention to than the often tedious mining of regulatory filing databases.
We worked with a sample of 49,652 non-earnings-related 8-Ks filings where the firm issued a press release on the same day as the 8-K. We then classified the public 8-K disclosures as “good” or “bad” news and used textual analysis to identify whether the press release pertained to the same event being discussed in the 8-K.
We found that a full one-third of the filings in our sample had an accompanying press release focused on an event different than the event that triggered the 8-K. This finding alone is important, as it invalidates assumptions held by many stakeholders that press releases and 8-Ks issued on the same day consistently relate to the same event.
In addition, we show that the issuance of unrelated press releases on days when firms disclose bad news on 8-Ks is not driven by managers’ fear of lawsuits over the bad news. We also show that managers with upcoming insider sales (and thus greater incentives to distract investors) are more likely to engage in this behavior.
Finally, we find that the use of concurrent, unrelated press releases impedes the market reaction to negative news by drawing investor attention away from the disclosure. The speed of price formation following negative 8-K news was significantly slower when the firm issued a concurrent unrelated press release. We corroborated these results by showing that the 8-K itself was downloaded fewer times from the SEC’s EDGAR website. This result provides more direct evidence that unrelated press releases reduce investor attention to negative 8-K filings.
Collectively, our findings suggest that managers are strategic in their choice of what type of press release to issue when filing negative 8-K disclosures, and this behavior is associated with a reduction in price efficiency. These findings thus shed light on a previously unexplored tool managers use to distract investors and increase their costs of processing information – Prior research examines investor information processing constraints arising from contemporaneous information events primarily based on variation in the number of other firms announcing earnings on the same day. In contrast, we provide novel evidence that managers seek to distract investors by issuing concurrent disclosures about unrelated events, a tool that managers have more direct control over.
Finally, our results increase our understanding of how managers use two of the most common disclosure methods together. Despite the frequency with which firms issue press releases concurrently with 8-Ks, we have a limited understanding of what these press releases actually say, as it has generally been assumed they relate to the same event that triggered the 8-K disclosure. Ours is the first study to examine this assumption, and we find that a large portion of press releases issued concurrently with 8-Ks relate to distinct events.
This post comes to us from professors Caleb Rawson at the University of Arkansas, Brady J. Twedt at the University of Oregon’s Lundquist College of Business, and Jessica Watkins at the University of Notre Dame. It is based on their recent article, “Managers’ Strategic Use of Concurrent Disclosure: Evidence from 8-K Filings and Press Releases,” available here.