With stock buybacks reaching historic levels in the U.S., Reuters published a very interesting piece on the subject yesterday called The Cannibalized Company. What their research shows is that many companies including HP, IBM and 3M, are spending more on buybacks and dividends than they are on R&D and other forms of capital spending. And what the critics are saying is that while these financial maneuvers may produce short-term gains for shareholders, in the long term they will cannibalize innovation, slow growth and harm U.S. competitiveness.
Over the last couple of years, we’ve seen many independent academic studies including one by Eric So, MIT and another by Joshua Livnat, NYU Stern and Li Zhang, Rutgers, that have concluded that alpha can be generated by trading on earnings date revision data from Wall Street Horizon.
The majority of publicly traded companies pre-announce when they will release their quarterly earnings results. By doing so shareholders, analysts, institutional investors and anyone else interested in the company's financial performance, can get online and wait for that moment when the company's 10-Q gets filed with the SEC and the press release comes across the wire.
This past Monday, November 2, 2015, was the first trading day for the two new Hewlett Packard companies, HP Inc. (NYSE: HPQ) which is operating the PC and printer businesses and Hewlett Packard Enterprise Co. (NYSE: HPE) which is operating the business software, hardware and services businesses. As with all spinoffs, there was a series of corporate events leading up to Monday when the two companies started trading independently. And as the following chart shows, there was significant price volatility around these events that an informed investor or trader could have taken advantage of . . . or avoided altogether.
Previous research has shown that the attention constraints of human traders (investors and market makers) has lead to systemic effects on stock prices. The less attention there is on a stock, the less efficient that stock's price will be to a negative earnings surprise, for example.
If you are reading this blog post, chances are good that you know what an earnings date is. But in case you don't, it's the date on which a public company makes an official statement regarding its profitability for a specific time period, typically a quarter or a year. Most financial professionals pay close attention to company earnings announcements for the obvious reason of wanting to know how well a company has done relative to their previous financial performance, analyst estimates or their peers. A subset of people however pay very close attention to the actual "date" of the earnings announcement because as academic research has shown, firm-initiated revisions to earnings announcement dates can predict a firm's future earnings news and provide a signal for superior investment returns.
As both the American Banker (The Art and Ego of Timing Bank Earnings Releases) and the Wall Street Journal, (Why J.P. Morgan Moved Its Earnings Relase), observed this week, for the first time in a long time J.P. Morgan chose to announce its earnings after the market close today, as opposed to before the opening bell as they have done consistently, every quarter, since at least 2Q 2005. The reason everyone is paying attention is because for many analysts, investors and journalists J.P. Morgan's earnings press release marks the beginning of the earnings season for the big-banks. And while this is not the type of date change that many of our clients track as a source for alpha, its nonetheless a pretty interesting story . . . and here is why . . .
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If you trade options, you know that if a company changes its earnings announcement date and the new date crosses an options expiration date, it can have a significant impact on the price of the option.
For this reason, in addition to providing you with the most accurate Prior and After earnings announcement dates, Wall Street Horizon's DateBreak data set will now include:
Information drives investing. Those who are able to detect trading signals in the overall flow of corporate data — beyond the data everyone is looking at — hold a decisive advantage over those who do not. The additional data to discern includes a public corporation’s scheduling and revision of an earnings announcement. Professor Joshua Livnat, New York University, and Assistant Professor Li Zhang, Rutgers Business School, have recently released "Is There News in the Timing of Earnings Announcements?" The authors find that the mere announcement of a scheduled earnings release date itself can be associated with significant abnormal returns if it either advances or delays the earnings announcement relative to prior expectations.