Information plays a crucial role in well-functioning stock markets, and corporate managers often possess private information about their firms’ performance and prospects. The rapid evolution of the COVID-19 pandemic and the enormous uncertainty associated with it has led firms into uncharted territory. What information can corporate managers share with the public regarding COVID-19? Are they proactive in providing that information? How does the timing of their release of such information compare to the information gathering activities of the public? Do investors adjust their assessments of stock prices based on these corporate disclosures? We seek to answer these questions in two research papers.
The early days of the pandemic witnessed a sharp increase in the demand and supply of information related to the pandemic. The number of news articles covering COVID-19 reached a daily peak of 20,486 on March 20th. Information about its impact on firms’ financial performance is especially desirable to a financial market that has just experienced a shockwave of uncertainty and been hit by several crashes. Our first paper documents firm behavior in making COVID-19-related disclosures and compares the timing of such disclosures to the timing of other information gathering activities such as Google searches and news articles related to the pandemic. Overall, we find that corporate managers are proactive in releasing COVID-19-related disclosures, but that these early disclosures tend to be generic.
Our second paper studies investors’ response to these firm disclosures by examining several capital market outcomes during the short window of time after the information is made available. We find that investors generally revise their assessment of equity values to a greater extent for those firms that discussed COVID-19 more, suggesting that these disclosures are generally informative. Finally, we examine responses from both firms and investors to the SEC’s filing deadline extensions. Recognizing the significant hardship that social-distancing measures have inflicted on firms’ financial reporting preparations, the SEC granted an unprecedented extension on firms’ filing deadlines as a special relief. As of May 15th, 820 firms have availed themselves of this relief. However, we document that the announcement of seeking relief attracts a negative cumulative abnormal return of 4.87% during the three trading days surrounding the announcement. Even though these firms are not at fault and there is no regulatory penalty for late filing, the market is not so forgiving.
Annual Reports and Earnings Conference Calls
All public firms are required to file annual financial reports with the SEC. We gathered annual reports filed within the first quarter of 2020 (ending March 31st) and extracted the discussion related to COVID-19. Among the 5,088 annual reports filed in the first quarter of 2020, a total of 2,310 mentioned COVID-19. Most annual reports filed during the first quarter related to the fiscal year ending in December 2019, so the discussions of COVID-19 were likely forward-looking assessments rather than explanations of past performance. Indeed, we observe that most of the COVID-19-related discussions were made in the risk factor disclosure (RFD) section. In 2005, the SEC mandated that all public firms (except for small firms with a market capitalization below 75 million USD) discuss factors that pose significant risks to their businesses. Such factors range from macroeconomic conditions to firm-specific strategies, such as M&A activities. This makes the RDF section a natural place for firms to discuss the uncertainty brought about by the pandemic. Among the 2,310 annual reports that discussed COVID-19, 2,122 (91.9%) discussed it in the RFD section. Ranking second was the Management Discussion and Analysis (MD&A) section, where 731 (31.6%) annual reports contained COVID-19 discussions.[i]
To further examine the content of the COVID-19-related disclosures in the annual reports, we apply a topic modelling technique. In the first quarter, firms had very little experience or guidance regarding how to prepare the COVID-19-related disclosures. Furthermore, the sudden arrival of the pandemic during the first quarter allowed little time for firms to thoroughly assess the impact. This could explain why we find COVID-19-related discussions in the first quarter were largely generic. Most firms acknowledged the event and cautioned investors against the potential negative effects. However, few firms included details on the specific structure and magnitude of the effect of COVID-19 on their operations. The SEC, after monitoring the situation for some time, released formal disclosure guidelines towards the end of the first quarter, on March 25th, 2020. The SEC urged firms to disclose effects specific to their businesses. Furthermore, the guidelines enumerate ten areas in which firms can assess the impact. Considering the largely generic disclosures, the SEC’s detailed guidance and emphasis on specificity are timely and helpful to firms that struggle to provide meaningful disclosures.
We collect 4,132 transcripts of earnings conference calls held in the first quarter of 2020. We then extract discussions that pertained to COVID-19 from the presentation session and the Q&A session. Among these conference calls, 2,504 mentioned COVID-19 in the main presentation, and 1,444 mentioned COVID-19 during the Q&A session. The number and percentage of conference calls that mentioned COVID-19 increased with time and with the severity and the extent of global spread of the pandemic. In the second half of March, almost every firm that held a conference call mentioned COVID-19 during the presentation session. Even so, financial analysts still raised questions about the pandemic during the Q&A session in about 50% of conference calls.
We further examine the overall tone of the conference calls by computing two textual measures for both the presentation session and Q&A session. We find that the firms which talked more about COVID-19 generally adopted a less positive tone and used more words of uncertainty, especially during the Q&A session. For both sessions, industry membership was a key determinant of whether firms discussed COVID-19. We find that a greater amount of COVID-19-related discussions is associated with stronger short-term market reactions, for both annual reports and earnings conference calls. This suggests that firm disclosures about COVID-19 provided useful information to the equity market. On the contrary, we find that investors did not respond to managers’ relative optimism as captured by the tone measures.
Google Searches and News Articles
We compare the trend of firm disclosures to the trend of other information gathering and disseminating activities. We first examine Google searches of COVID-19. Prior studies find that Google searches are a leading indicator of consumer decisions and macroeconomic factors. One interesting prior finding is that Google search volumes could predict influenza epidemics. Google Trend indicates that searches of COVID-19 (or coronavirus) keywords were minimal prior to January 21st, 2020, consistent with the initial impact being limited inside China. We observe steady increases in COVID-19 searches since that date. The combined global search volume for all the COVID-19 keywords reached its peak on March 16th and for the U.S. on March 15th. Comparing the trend of Google searches with the trend of firm disclosures, we find that corporate disclosures grew in tandem with Google searches. Moreover, firm managers continued releasing information about COVID-19 even during the quiet period when the growth in both global confirmed cases and Google searches slowed down. This suggests that corporate disclosures more than keep up with the information demand from the public.
The second source of information we examine is news articles. Unlike Google searches that occur prior to an action, news articles typically record what has already happened. Therefore, coverage of news articles is usually a lagging indicator of attention to, and interest of, an event. We observe that news coverage of COVID-19 was almost non-existent in early January, but started gaining significant momentum in mid-January and continued increasing after that. Globally, a total of 20,486 COVID-19 news articles appeared in English language newspapers on the single day of March 20th, 2020. Comparing the trend of news articles with the trend of Google searches and firm disclosures, we find that the increase in the number of news articles occurred earlier than the increase in both Google searches and firm disclosures. However, as the pandemic became more evident in early February, corporate disclosures have been leading both Google searches and news articles. We observe that the amount of COVID-19-related firm disclosure was increasing at a faster rate than news articles during the second half of the first quarter. Furthermore, firm disclosure continued increasing while the trend for news articles reached a plateau.
SEC’s Relief on Filing Deadlines
The SEC granted an unprecedented extension on filing deadlines as a special relief for firms affected by the pandemic. The SEC issued the official order on March 4 and later replaced it with a more elaborated one on March 25th. The relief granted a 45-day extension on filing deadlines without any penalty. Firms that apply for this extension needed to file a Current Report via form 8-K or 6-K, explaining how COVID-19 had affected their ability to file on time. At the end of our sample period on April 24th, a total of 433 firms had applied for this relief. For this blog post, we updated the data and find 820 firms have availed themselves of this relief as of May 15th, 2020, affecting 1,123 filings. Some firms have delayed more than one type of filing, for example, their 2019 annual reports and their Q1 quarterly reports of 2020.
Our empirical test reveals a negative market reaction to firms that announce that they are seeking this relief. On average, firms experienced a negative cumulative abnormal return of 4.87% within the three trading days surrounding the announcement. The negative market reaction shows that market participants initially underestimated the impact of the pandemic on these firms. Because investors especially thirst for information during times of uncertainty like this, the inability to provide timely information could exacerbate investors’ anxiety and fear. The negative reaction from investors highlights the importance of providing timely disclosures of information amid the current crisis. Such disclosure “has a generally calming value that contributes to market function”, as SEC Chairman Jay Clayton put it in his recent speech to the Financial Stability Oversight Council on May 14th, 2020.
[i] The percentages add up to more than one hundred because some firms discuss the Coronavirus (Covid-19) in more than one sections of the annual report.