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‘Nothing to see here’: How corporate spin confuses Wall Street

Katelynn C Hipolito — Wed, 08 Oct 2025 14:38:35 +0000

‘Nothing to see here’: How corporate spin confuses Wall Street Katelynn C Hipolito Wed, 10/08/2025 - 10:38

Managers’ attempts to distract investors from bad news have serious implications for market efficiency.

Public-relations professionals call it “getting ahead of the story”—feeding positive spin to the media to blunt the impact of unflattering news to come. Celebrities engage in it; so do companies when, for example, their forthcoming earnings report is destined to disappoint. But do these face-saving distraction tactics affect the long-term movement of share prices?

Min Shen, associate professor of accounting at Costello College of Business at �鶹��Ƶ, recently published a paper in The Accounting Review suggesting that traders see through these pre-emptive disclosures of positive news, and change their info-seeking behavior accordingly.

Shen’s co-authors were Edward Xuejun Li of Baruch College, K. Ramesh of Rice University, and Joanna Shuang Wu of University of Rochester.

The researchers analyzed share price movements surrounding corporate and non-corporate disclosures between January 2003 and March 2016 (35,330 firm-year observations in their sample). Corporate disclosures included earnings announcements, management guidance, press releases, SEC filings, etc. Non-corporate disclosures come from intermediaries such as analysts, credit rating agencies and journalistic outlets.

Splitting the firm-years into “good” and “bad” years based on stock performance, the researchers uncovered a striking discrepancy. During a bad year (i.e. when a company was underperforming relative to peers), the market’s immediate response to corporate disclosures had much less of a lingering effect, accounting for a mere 40 percent of price discovery over the course of the year. The equivalent figure for good years was around 60 percent.

Shen stresses that corporate disclosures were no less frequent during bad years, but they were seen as less informative. Press releases were one of the main drivers of the disparity: Their contribution to price discovery fell from an average of 27 percent during good years, to three percent in bad times.

Min Shen. Photo by Costello Marketing and Communications.

“A company might rush a press release announcing a new AI model, or a new five-year contract with the government, in anticipation of an upcoming adverse disclosure,” Shen says. “And for bad news, they try to delay it as much as possible, until they are forced to disclose in mandatory SEC filings.”

This gap was basically unaffected by the 2008 global financial crisis. “We picked 2009 as the cut-off year, and compared pre-crisis to post-crisis,” Shen says. “In the post-crisis period, we find management teams became somewhat more cautious and less inclined to withhold bad news. So the gap between good-news and bad-news years narrowed a bit, but the main findings still hold.”

So if official disclosures from underperforming companies became less influential, where was the market getting its information during bad years? In the absence of reliable public disclosures, investors intensified their search for private information. The price-setting power of so-called “extreme order imbalances”—incidents of severely lopsided supply and demand that are often triggered by private information-sharing—was greater during bad years.

Moreover, by sharing what they know, outside monitors such as short sellers, equity analysts, and dedicated long-term institutional investors can put pressure on managers to be more transparent about bad news. Shen and her co-authors found that more stringent external monitoring by these market participants was associated with faster disclosure of bad news. When managers see that the news they are trying to bury is leaking out anyway through other channels, they may conclude that there’s nothing to be gained by continuing the cover-up.

Shen says her paper calls attention to how conflicting managerial incentives shape disclosure. “Managers are driven by compensation and job security incentives, which are pegged to benchmarks such as target share price or debt-to-equity ratio. That’s why they disclose good news as fast as possible, and try to hide bad news.”

But managers’ attempts to control the narrative are bounded by government regulations (e.g. SEC reporting requirements) and the company’s risk of a shareholder lawsuit that may follow a sudden decline in share price. Therefore, Shen suggests that policymakers could consider playing a more active role.

“SEC filings are quite significant for price discovery during bad years and insignificant during good years,” Shen says. “Mandatory disclosure brings bad news to light faster, because management faces more severe penalties and heightened litigation risk if they insist on burying it.”

In This Story

Min Shen

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�鶹��Ƶ researcher helps the SEC walk the talk

Marianne Klinker — Tue, 31 Jan 2023 14:37:09 +0000

�鶹��Ƶ researcher helps the SEC walk the talk Marianne Klinker Tue, 01/31/2023 - 09:37

Research by �鶹��Ƶ Accounting Professor Bret Johnson, a former SEC staff accountant and academic fellow, shows how seemingly mundane intra-agency policies can have unintended effects that benefit Wall Street over Main Street.

The U.S. Securities and Exchange Commission (SEC) has long seen itself as a friend to the retail investor, doing everything it can to ensure that financial markets offer both large and small players roughly equal opportunity to succeed. Most recently, that mandate provided the rationale for a slate of sweeping rule changes that would, among other things, shine a light on the opaque business arrangements between wholesale brokers and trading apps such as Robinhood. It adds up to what some industry insiders are calling the largest-scale SEC intervention in nearly 20 years.

Bret Johnson

To its credit, the SEC is just as committed to promoting fairness and transparency in-house as it is to ambitious industry reforms. The agency even invites accounting academics to research its inner workings via the SEC Academic Fellowship Program. �鶹��Ƶ School of Business accounting professor and former SEC staff accountant Bret Johnson was selected for the year-long program starting in August 2020.

Johnson says, "My role was to be a liaison between the SEC and the academic community…Often, my research uncovers some problem or something they can improve on, some inefficiencies. And I found they are very open to embracing this type of research."

For example, Johnson's recent research paper in Review of Accounting Studies co-authored by Michael Iselin of the University of Minnesota, Jacob Ott of the London School of Economics, and Jacob Raleigh of Monash University, finds that while the SEC's monitoring arm – the Division of Corporation Finance (DCF), where he worked for six years – seems to focus less on firms with a high percentage of retail ownership, the Division of Enforcement (DOE) appears to take a harder line with these firms. In other words, irregularities are less likely to be spotted early and addressed through non-punitive means when the firm in question has a larger proportion of retail investors.

"My role was to be a liaison between the SEC and the academic community…Often, my research uncovers some problem or something they can improve on, some inefficiencies. And I found they are very open to embracing this type of research." - Bret Johnson

The SEC's enforcement-heavy approach may disadvantage retail investors because once the enforcement action becomes common knowledge, the "Main Street" investors who hold disproportionate stock in the target company will lose out when the share price falls. In this way, the SEC does not seem to be acting in accordance with its stated mission to protect mom and pop investors.

Johnson can only guess at what's going on here. He speculates that firms that attract retail investors may share other characteristics that cause the SEC to flag them for enforcement rather than monitoring. For instance, the paper finds that retail ownership was positively associated with firm visibility and performance volatility, and negatively associated with external monitoring and structural complexity. The discrepancy may also have to do with how resources are distributed between the DOE and DCF.

In other cases, the agency's good-faith attempts to increase market transparency on behalf of less savvy investors can backfire. Based on analytics from the publicly available filings database on the SEC website, Johnson's 2020 paper in The Accounting Review, co-authored by Michael S. Drake and Jacob R. Thornock of Brigham Young University, and Darren T. Roulstone of The Ohio State University, concluded that institutional users (e.g. investment banks, hedge funds, asset managers, and financial institutions) were profiting handsomely from their search activities on the online resource, while retail investors saw little to no benefit. Abnormal search volume from Wall Street was associated with future returns for the focal firms of up to 10.5 percent. No such pattern was seen on Main Street.

In addition, how the SEC balances the need for transparency against its relationships with companies can have unintentional knock-on effects. Johnson’s 2022 paper in Management Science, co-authored by Marshall A. Geiger and Abdullah Kumas of the University of Richmond, and Keith L. Jones of the University of Kansas, found that for companies that had just received an SEC comment letter, there was a sizeable uptick in sell-offs among mutual funds and other major players during the short period (initially 45 days, then shortened to 20 days) before the letter went public. The best explanation was that high-ranking executives were sharing non-public information with investors close to the company concerned.

The 20-day privacy window is meant to prevent companies’ confidential information from being accidentally released through an over-hasty process. But it may also create information asymmetry that benefits industry insiders at the expense of retail investors – the very favoritism that the agency intends to combat.

There are no simple answers to the questions posed by Johnson’s research. Even seemingly mundane intra-agency decisions, such as resource allocations and the length of the confidentiality window for comment letters, can have complicated ripple effects. Sometimes, it takes an informed outsider to trace these ripple effects and draw evidence-based conclusions. "I am happy to see that the SEC continues to solicit – and take seriously – academic research into its policies and practices," Johnson says. After all, sweeping industry reforms may make headlines, but fine-tuning how the agency itself functions is a quieter but no less material way of promoting fairness and transparency in financial markets.

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Unpacking the Graphic Content of Annual Reports

Jennifer Anzaldi — Thu, 28 Apr 2022 14:46:07 +0000

Unpacking the Graphic Content of Annual Reports Jennifer Anzaldi Thu, 04/28/2022 - 10:46

In This Story

Lei Gao

Bo Hu

Lei Gao and Bo Hu

Viewed one way, the corporate annual report is redundant, merely repeating information in publicly available 10-K filings, as well as on Bloomberg, Yahoo! Finance, etc. Still, most companies that issue stock publish annual reports for the general public, despite the SEC not requiring them to do so.

Part of the reason may be that with the annual report, companies are in complete control of the presentation. They can use graphic elements to capture and direct investor attention. Visuals can also convey suggestive messages that, though non-explicit, can exert subtle influence. Color choices, for example, carry emotional associations that can transfer over to the firm; pleasant or exciting illustrations can affect how readers interpret information. These graphic effects can help managers hint at hidden strengths or intangible assets not yet reflected in the firm’s financials.

According to a recent working paper co-authored by �鶹��Ƶ finance professors Lei Gao and Bo Hu, more than 80 percent of U.S. public firms use graphics in their annual reports. Further, visual presentation has market benefits as well as aesthetic ones.

Lei and Bo, and their co-authors Wesley Deng of University of New South Wales and Guofu Zhou of Washington University in St. Louis, analyzed the annual reports of 1,322 companies from 1994-2019 alongside their financial performance. They focused particularly on reports that, from one year to the next, exhibited a sudden increase in “graphicity”—a construct invented by the researchers to measure the ratio of visual to verbal information contained in a report. Graphicity was calculated with the help of a machine learning algorithm capable of detecting, among other things, the relative size, color, and number of graphic elements in a document.

The researchers discovered that firms that went in a more graphical direction received an average abnormal return of 3.5 percent over the three-to-six-month period following the release of their report. The bump in stock returns could not be explained through other characteristics such as institutional ownership, analyst coverage and short selling constraints.

The three-to-six-month delay represents the time it takes for the subtle information in graphic reports to permeate the market. “Numbers can be picked up in no time by algorithms and factored into the stock price,” Lei said. “But graphic information takes time to consume, it’s harder to pick up this kind of information.”

The researchers also looked at the firms’ business activities to determine whether going graphic could be construed as signaling an intention. They found a pattern of increased R&D investment in the three years following a pivot to visual communications in the annual report.

“An optimistic take on this correlation would be that firms are using visuals to telegraph their soon-to-be-realized potential to investors,” Bo said. In other words, graphicity could function as a kind of “Watch out, here I come” announcement to the market. Visual cues can also give a non-specific sense of what’s being planned in terms of innovation and tech adoption. For example, a manufacturing firm can display its aspirations through an image of a futuristic factory.

On the other hand, graphicity can sometimes be misleading. “Not every R&D initiative will be value-adding,” Lei reminds us. Firms could be using images to paint a risky investment with a rosier tint. “These firms are doing something serious, but it’s hard to deliver. They might face more uncertainty. So, they use soft information to make claims, because if you put in hard numbers you’re liable for the risks.”

Lei and Bo say that theirs is the first paper to quantify the market impact of the tacit messaging conveyed by the graphic design of annual reports. Their findings imply that regulators should perhaps pay attention, since the visual content of corporate documents are absorbed by investors as information, not decoration. Moreover, the signals embedded within visual cues are not wholly ambiguous but consistently predictive of future firm activity, i.e. R&D investment. You could say that high-graphicity reports are communicating with investors on two dimensions at once— visual and verbal—while regulators now are probably concerned only with the latter.

If the government were to monitor the graphic content of annual reports, Lei and Bo’s methodology gives some clues about how it might be done fairly and with minimal human labor. Primed with a construct such as graphicity, an algorithm could crawl through annual reports (usually found within the “Investor Relations” section of a corporate website) and trigger an alert whenever it spotted abrupt and sizeable shifts—50 percent was the threshold the researchers used—from verbal to visual presentation.

“Consistent with our model, this work provides evidence of a new anomaly in financial markets,” Bo said. “If it is not recognized, it must be novel and needs more attention from market participants.”

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