Friday Night Secrets (Part 1)

On July 23, 2015, Roni Michaely, Amir Rubin, and Alexander Vedrashko posted an article to the Social Science Research Network called “When Is the Best Time to Hide Earnings News?”

Their study sample included all quarterly earnings announcements in I/B/E/S from 1999 through 2013 that also have daily return data in the Center for Research in Securities Prices database. They divided earnings announcements into 15 “timing cells:” before market open, during the trading day, and after market close (evenings) for each day of the week. They looked at delay in stock price change called post-earnings announcement drift (PEAD).

Michaely et. al write:

      > There are two necessary conditions to conclude that management
      > opportunistically times earnings announcements. First, firms must
      > have an incentive to time the news, for example, to hide bad
      > earnings; and second, this opportunistic behavior must be
      > effective–that is, such behavior must enable the firm to affect
      > the market reaction. In this paper, we find evidence for both…
      > …the Friday evening timing cell tends to be associated with more
      > negative earnings news than any other timing cell, including other
      > evening or Friday announcements.
      >
      > Although the concentration of negative news on Friday evening
      > indicates the possibility of making opportunistic announcements at
      > that time, rational managers would only engage in such opportunistic
      > behavior if they can successfully reduce the market reaction to the
      > news. We posit that the defining attribute for testing opportunism
      > would be to analyze PEAD in different timing cells. We find that…
      > …Friday evening announcements are associated with the highest
      > positive and negative drifts following positive and negative news,
      > respectively. A trading strategy that trades in the direction of the
      > surprise after earnings releases on Friday evening is highly
      > profitable and implies that the market is inefficient when
      > announcements are made on Friday evening. Because Friday evening
      > news is not fully reflected in prices immediately, according to our
      > analysis, managers and other insiders seem to exploit this trading
      > opportunity.

I will continue in the next post.