Earlier this week, we discussed a March 2016 study by Rodney Boehme, Veljko Fotak and Anthony May, “Crash Risk and Seasoned Equity Offerings,” which provided evidence that companies will tend to withhold (and accumulate) bad news for an extended period of time, keeping stock prices temporarily higher (think WorldCom and Enron). Bad news, however, cannot be postponed indefinitely.
When the accumulated bad news is eventually revealed, the stock performs poorly (with a significant increase in the risk of the stock price crashing). They concluded: “Our research shines the spotlight on an observable corporate event that embodies useful information regarding future tail risk in equity returns.”
Read the rest of the article on ETF.com.