Why Firms Announce Good News Late: Earnings Management and Financial Reporting Timeliness

Abstract

Prior studies find that delayed earnings announcements tend to communicate unfavorable news, and investors consequently react negatively when firms delay earnings announcements. However, these findings do not explain why investors discount delayed earnings, even after controlling for the earnings news, and why firms sometimes announce good news late. Motivated by theory from Trueman (1990) that attempts to explain these phenomena, we examine whether announcement delays indicate earnings management. We find that good news firms with higher discretionary accruals are more likely to announce earnings late. Consistent with post fiscal year-end activities driving announcement delays, we fail to find a relation between measures of real earnings management and late announcements. Using a last-chance earnings management measure based on tax expense manipulation, we find strong evidence that good news firms engaging in last-chance earnings management are more likely to delay earnings announcements. Consistent with Trueman’s (1990) theory that earnings management explains why investors discount delayed earnings announcements, we find that the negative relation between earnings announcement returns and announcement delays is partially driven by late announcers relying on last-chance earnings management to beat analysts’ expectations.