Booyah Breakdown: After Hours on the Street

Ok, Everyone's Gone!

Reporting after hours used to be reserved for companies with bad news. "The idea was to report at a time when not many people were looking," says Ed Ketz, associate accounting professor at Penn State University.

But two things happened that blew that theory out of the water.

• Investors started to assume that any after-hours announcement was going to bad news. So regardless of the information, the company's stock took it on the chin.
• Pre- and post-market trading became available. So traders started to stick around after hours. Now there was no hiding from the markets, and companies could no longer hide their bad news.

Earnings Gyrations

Whether the news is good or bad, a company's quarterly earnings release can cause huge gyrations in the stock price, according to Dirk Van Dijk, director of research at Zacks Investment Research.

But a stock doesn't have to go to extremes to move, which can happen just by meeting analysts' expectations. Take Google (GOOG Quote). The company reported that fourth-quarter profits tripled, but its net revenue was just slightly above analysts' expectations. As a result, the stock fell in after-hours trading because investors were hoping for a blowout.

So clearly earnings releases can cause big stock moves.

Now if that's the case, the more liquidity in the stock, the better to smooth out those gyrations, according to David Goldenberg, an associate professor of investments and derivatives at Rensselaer Polytechnic Institute's Lally School of Management and Technology. Goldenberg refers to a study that shows that prices are more efficient and that more information is revealed per hour during the trading day than after hours. So more companies should, in theory, report during trading hours. But that has not been the trend, as almost 90% of all companies report before or after hours these days.

It's Better After-hours

And there's good reason for it.

"I prefer it when companies report after hours. It makes for more orderly trading, instead of many fluctuations that are meaningless," says Ashok Ahuja of Icor, a Westport, Conn., firm that operates a technology hedge fund. He says about 95% of the technology companies he follows report around 4:30.

Releasing earnings when the markets are closed gives investors time to digest the information. It allows them to think through the news and avoid rash decisions. "It also puts everyone on more of a level playing field. It's very much in keeping within the spirit of fair play," says Van Dijk.

Of course, reporting when the markets are closed doesn't necessarily prevent price spikes because of surprising news. But it does prevent knee-jerk reactions.

Perception is Everything

Regardless of when companies report their earnings announcements, though, it's important they stay consistent. "Studies have shown that if a company typically reports 30 days after the close of its quarter but instead reports 35 days after, the market will presume bad news, just because of lateness," notes Ketz.

And while there are no SEC guidelines as to what goes in an earnings release, (see this previous story for more on that) the SEC will step in if a company waits too long to report its news to the market.

So timing does play a role when disseminating financial information, and now you understand some of the rationale.