Last year, several companies were late in announcing their annual earnings for various reasons.
The reasons for the delays are very varied; from incomplete accounting processes to internal investigations on specific accounting issues such as valuation methodologies, as in the case of Kenya Re.
Some, even after multiple extensions, have not filed within the allowed grace period. Occasionally, some will postpone the publication of results for some unforeseen reason.
Be that as it may, if the important part of a company’s management job is to communicate the value of a company to shareholders at all times, why is good news often shared with investors immediately, while bad news lag behind?
According to the Capital Markets Authority (CMA), over the course of a fiscal year, you expect a publicly traded company to report earnings on at least two separate major occasions.
For interim reports or semi-annual numbers, companies get 60 days from the interim balance date, while in the case of annual results, four months are given from the end of the financial year to the company to present its results.
In addition, each issuer is expected to make immediate public disclosure of information that can reasonably be expected to have a material effect on market activity on the prices of its securities.
In addition, information to be disclosed under these regulations must be made within 24 hours of the event, simultaneously to CMA, the Nairobi Stock Exchange (NSE), and to the public during non-business hours.
With that track record and a track record of companies changing the times of their earnings announcement dates, should we specifically be suspicious of companies that delay announcing their results?
Research suggests that investors, unless instructed otherwise, interpret delayed earnings announcements as having negative consequences for earnings, and these expectations are generally met.
In other words, late contributors tend to be followed by continued poor operation (represented by return on assets) and stock price performance. Of course, certain seasons require investors to judge differently; A good example is the current Covid-19 lockdown, which will likely push some companies to delay their results due to disruption. However, companies with bad news tend to delay their announcements and that does not put a happy face on many investors.
The conclusion is simple; Failing to meet the CMA submission deadlines is not a good sign. Often relays news about deeper underlying issues.
More importantly, the idea is that markets generally like to know information as soon as management knows it, rather than getting it late. Late filings delay disclosures that help investors make informed investment decisions and, as a result, increase information asymmetry and trading costs.
So the next time a company has plans to report fiscal year results two months later than expected, you may want to lighten your position. On the contrary, if the report date arrives much earlier than expected, it is a purchase.
Mr Mwanyasi is the Managing Director of Canaan Capital