Getting the Biggest Bang from Earnings News

To preannounce or to surprise? That's the question that so many corporate finance chiefs grapple with every time their quarterly numbers come in higher or lower than what Wall Street expects. The objective is to minimize the havoc on the stock price if it's negative news, and garner the biggest pop if it's positive.

A new study released on Monday by Reuters Estimates provides some answers. And it turns out that plenty of companies have been making the wrong choice.

Reuters looked at S&P 500 companies that either preannounced their earnings or waited to surprise Wall Street between 2003 and 2006. They excluded companies with major deviations, since the SEC requires preannouncements for such dramatic swings. Instead, they stuck to surprises of three cents or less in either direction.

The results are fairly unsurprising: Stocks rise more when companies preannounce positive surprises and they fall less when companies wait to deliver negative news. It makes sense, really. Give good news as soon as you've got it and procrastinate on delivering bad news.

What is surprising, however, is that many companies do the opposite, particularly when they are dealt negative news. Reuters found that 897 companies preannounced when they had bad news, far more than the 495 who chose to wait it out. When companies preannounced their disappointing numbers, their stock fell 7.43 percent on average. They dropped just 2.05 percent when they chose to surprise investors instead.

Companies were a little smarter on the delivery when a jump in stock price was expected. When the news came early in a preannouncement, the average stock price rose 5.19 percent, versus a 2.71 percent rise when they held out on sharing the good news. A total of 1,184 companies preannounced, while 819 surprised.

by Megan Barnett

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