Two little-known researchers, focusing on a piece of the earnings cycle that very few pay any attention to, may have found a profitable anomaly for investors.
A research paper by Romain Boulland of the ESSEC Business School in France and Olivier Dessaint of the University of Toronto looks at when companies announce they will announce their earnings. So, to be clear, this is not an investigation into when companies “actually” announce earnings, but when they tell investors they are going to announce.
Titled “Announcing the Announcement,” the paper presented this past weekend at the American Economic Association’s annual meeting in Boston found that companies use this “advanced noticed period” to manipulate the attention of investors. Boulland and Dessaint used a data set that included 53,000 announcements from 2007 through 2012. They show that earlier announcements of the announcement or ANPs are associated with upside earnings surprises. Later announcements are linked to downside surprises.
In fact, when a company announced its announcement eight days or more days earlier than it did in the same quarter a year earlier, upside earnings surprises averaged 0.6 cents per share. When the ANP is eight or more days later—that is, less notice period—downside surprises averaged 1.4 cents per share.
According to the paper, the market isn’t wise to this. “Investors do not perceive the implications of a change in the advance notice period,” the researchers said.
Boulland and Dessaint suggest management is manipulating the attention of investors. It’s the same as a person sending a “save the date” announcement for a big wedding even before the actual invitation is sent. More lead time leads to more attendance. Managers see an upside earnings surprise like a wedding: They want to make sure everyone is at the big party.
“This ‘first-come, first-served’ rule implies that a longer advance notice period increases the probability that the announcing firm is first on investors’ agenda,” according to the paper.
Boulland and Dessaint find that earlier announcements are associated with more investors attending conference calls, greater likelihood of appearing in important stocks to watch lists and more email alerts about the upcoming earnings announcement. It’s also associated with greater trading volume when the earnings are released. (All of those effects work in reverse when the announcement period is lessened.)
The researchers acknowledged this doesn’t work for all companies. Managers of “highly visible firms whose stock is consistently scrutinized by the market” can’t do much to change investors’ attention. So a change in the ANP is “much more informative about the earnings surprise for less visible firms, i.e. firms with the same fiscal year-end as their industry peers, which thus report earnings at the same moment as their competitors, firms with low analysts coverage, and small-cap companies.”
The two even offer a trading strategy that they say yields a “abnormal returns of 6 basis points per day (1.2 percent per month) before transaction costs.”