Ideas & Debate

Why you need to worry about firms delaying their results

investors

Guests during the release of a company's half-year financial results at a Nairobi hotel on August 15, 2018. FILE PHOTO | NMG

In the past year, several companies have delayed announcing their annual earnings for a variety of reasons.

Reasons for delays are wide-ranging; 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 several extensions, have failed to file within the allowed grace period. Occasionally, some will postpone an earnings release for some unforeseen reason.

Be that as it may, if the important part of the company’s management's job is to communicate a business’s value to shareholders at all times, why is it that good news is usually shared with investors right away, while bad news lags?

According to the Capital Markets Authority (CMA), during the course of a fiscal year, it expects that a listed company will report earnings on at least two main separate occasions.

For interim reports or half yearly numbers, companies get 60 days of the interim balance date while in the case of annual results, four months from the end of the financial year are given to the company to submit their results.

In addition, every issuer is expected to make immediate public disclosure of information which might reasonably be expected to have a material effect on market activity in the prices of its securities.

Furthermore, information required to be disclosed under these regulations be made within 24 hours of the event, simultaneously to CMA, the Nairobi Securities Exchange (NSE) and to the public during non-trading hours.

With that background and a history of companies shifting the timings of their earnings announcement dates, do we specifically need to be suspicious of companies delaying announcing their results?

Research suggests that investors, unless told otherwise, interpret delayed earnings announcements as having negative consequences for earnings—and these expectations are generally realised.

In other words, late filers tend to be followed by continued poor operating (represented by return on assets) and stock price performance. Of course, certain seasons demand investors judge differently— a good example is the current Covid- 19 lockdown which is likely to push some companies to delay their results because of the disruption caused. Nonetheless, companies with bad news tend to push their announcements back and that does not put a happy face on many investors.

The bottom line is simple; missing CMA’s filing deadlines is not a very good sign. It often conveys news about deeper underlying problems.

More importantly, the idea is that markets generally like to know information as soon as the management knows, rather than getting it at a delay. 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 you hold plans to report its fiscal year results two months later than expected, you might want to lighten up on your position. Conversely, if the reporting date comes in much earlier than expected, it’s a buy.

Mr Mwanyasi is the managing director at Canaan Capital