Companies Use Unrelated Press Releases to Distract from Bad News

The Tactical Use of Unrelated News

On the same day a publicly traded company files a negative report with the Securities and Exchange Commission (SEC), it is more likely to issue a press release touting unrelated news. This strategic move aims to divert investors’ attention away from the bad news.

Researchers at the University of Notre Dame and the University of Arkansas studied thousands of 8-K filings and accompanying press releases between 2005 and 2018. They found that companies disclosing negative information via 8-K were 7% more likely to concurrently issue a press release featuring positive, unrelated news.

The researchers examined close to 50,000 non-earnings-related 8-K filings where the firm also issued a news release on the same day. One-third of the filings in their sample had an accompanying press release focused on an event or news different than the underlying event that triggered the 8-K.

How It Works

The study 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 as mentioned in the 8-K. The researchers also found that the use of concurrent, unrelated press releases impedes the market reaction to negative news by drawing investor attention away from the disclosure.

For instance, 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. This is an example of a related press release.

A Closer Look

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. This illustrates how companies use unrelated press releases to distract from negative news.

Implications

The researchers’ findings shed light on a previously unexplored tool managers use to exploit investors’ processing capacity. “There are only so many disclosures an investor can process at a time, and when faced with multiple disclosures, it takes longer for investors to interpret what is going on,” said Caleb Rawson, an assistant professor and author of the study.

The study highlights the need for investors to be aware of this strategy and to carefully analyze the information disclosed by companies. It also raises questions about the role of regulatory bodies in ensuring transparency and fairness in corporate disclosure.

Industry Context

This phenomenon is not unique to the United States. Companies globally use press releases to communicate with their stakeholders. According to a report by the International Organization of Securities Commissions (IOSCO), companies use press releases to disclose information to a wide range of stakeholders, including investors, analysts, and the media.

The use of unrelated press releases to distract from negative news is a common practice in various industries. For example, in the technology sector, companies often use press releases to announce new products or partnerships. However, these announcements can sometimes be used to overshadow negative news.

History of 8-K Filings

The SEC requires publicly traded companies to file 8-K reports to notify shareholders of any major events. The requirement for 8-K filings was introduced to provide investors with timely information about significant events that could impact a company’s financial condition.

Over the years, the SEC has updated the rules surrounding 8-K filings to ensure that investors receive accurate and timely information. However, the use of unrelated press releases to distract from negative news remains a challenge.

Technical Mechanics

The researchers used textual analysis to identify whether the press release pertained to the same event as mentioned in the 8-K. This involved analyzing the language used in the press release and the 8-K filing to determine if they were related.

The study found that companies use various techniques to make their press releases appear unrelated to the 8-K filing. For example, they may use different terminology or focus on different aspects of the event.

Downstream Implications

The study’s findings have significant implications for investors and regulators. Investors should not assume press releases cover all events happening at a company at a given time. The SEC and other regulatory bodies may need to re-examine the rules surrounding 8-K filings and press releases to ensure transparency and fairness.

The decision regulators and company executives make in response to these findings will be crucial in determining the future of corporate disclosure and investor relations.

What’s Next

In the future, researchers may investigate the effectiveness of the SEC’s rules and regulations in preventing the use of unrelated press releases to distract from negative news. They may also explore the impact of this practice on investors and the overall financial market.

The study’s results have significant implications for the ongoing debate about corporate disclosure and investor relations. As the regulatory landscape continues to evolve, it is essential for investors, regulators, and company executives to stay informed about the latest research and findings.

The researchers’ findings also highlight the need for investors to be vigilant and to carefully analyze the information disclosed by companies. By doing so, investors can make more informed decisions and avoid being misled by unrelated press releases.

Conclusion

In conclusion, the study provides new insights into the use of unrelated press releases by companies to distract from negative news. The findings have significant implications for investors, regulators, and company executives. As the regulatory landscape continues to evolve, it is essential for stakeholders to stay informed about the latest research and findings.

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