A couple of readers have emailed and tweeted to ask: Why does a company like PTC rush to announce bad news? After all, they reason, releasing the news now or later doesn’t change the ultimate outcome: PTC’s results are what they are, the stock price probably would decline on the news no matter when it is announced, and we all could have remained blissfully ignorant for a bit longer.
It’s a very good question, one that deserves a better answer than can be squeezed into 140-character Twitter response. Read on …
In the US, sale of a company’s shares to the public is governed by the rules of the Securities and Exchange Commission (SEC). The SEC exists to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The SEC strives to ensure that “all investors … have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.” Bottom line: no investor should have better or more information than an other.
At its simplest, then, a preannouncement is a way to ensure that no one acts on information the rest of the investor community doesn’t have. As soon as a material fact is known, it’s made public — that way, if a company executive later lets slip that there’s a root cause analysis being done on the sales forecasting methodology, it’s not considered “insider information”.
Companies also preannounce to try to fend off litigation. Shareholders have sued companies for having known information and not reveling it, causing losses to investors who bought stock after the company knew of a revenue miss, or manufacturing problem or some other bad news that later caused the share price to tank. Even if the shareholders don’t always win these suits, they are expensive to deal with and depress the share price because the company can be seen as less than transparent.
But cynics see preannouncements as a lot more manipulative. By announcing results weeks early, the company doing the announcing holds the spotlight on itself. It avoids comparisons to the possibly very upbeat results posted by competitors, which may keep its share price from tanking while driving up the competitor’s. Too, a preannouncement can be see as a “mid-course correction” that enables financial analysts to tweak their models so that, when the final results come out, there may actually be a positive spin on the news.
It’s more than gut feel that a preannouncement helps soften the blow to investors. I’ve seen research that indicates that companies that preannounce their results are seen as more open and communicative, and that their share price generally stayed higher than peers that did not disclose earnings “surprises” before the scheduled release date. One study found that “companies that pre-announced a downside miss were not “punished” twice. They actually experienced better returns than companies that did not pre-announce.”
In case you were wondering, preannouncements aren’t at all unusual. In fact, according to www.investorplace.com, writing about the US stock markets as a whole, “there have so far been 83 negative pre-announcements regarding first-quarter  earnings, versus 28 positive pre-announcements, according to Thomson Reuters”.
If you’ve ever listened in on an investor call, you’ll know that earnings releases are as much about marketing as they are about satisfying SEC requirements. News is spun to the best possible interpretation, shots are taken at the competition and performance is highlighted in all sorts of ways. Some companies, for example, always seem to come in slightly ahead of expectation — one has to wonder why they just don’t get better/more optimistic in their forecasts. Again, the cynical answer is that they want the headline that crows about beating expectations for the Nth quarter in a row, since that will send the share price up just a little bit more.
So whether the motivation is to avoid regulatory or legal hassles, to put the best possible spin on a bit of news or to keep the share price from spiking too much, preannouncements make a lot of sense.
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