At Harbert: Research
Danny Qin Assistant Professor Department of Finance
Buyer Beware
I nformation drives stock pricing. No surprise there. And managers may “strategically” disclose that infor- mation to best advantage themselves and/or their company. No surprise there either. Publicly traded companies issue press releases all the time. However, to ensure the adequate flow of infor- mation when those releases announce events that could impact company earnings — “material” events — the Securities and Exchange Commission (SEC) mandates companies file form 8-K, stating that it “is to be filed or furnished within four business days after occurrence of the event.” Harbert Assistant Professor of Finance, Danny Qin and his research collaborators, Sean Cao (University of Maryland) and Tao Shu (Chinese University of Hong Kong) found a little quirk in the 8-K form. Their research led them to discover how firms exploit that quirk, how investors react, and who makes money and who doesn’t. For individual investors, it’s a cautionary tale. The SEC has some very specific instructions on 8-K filings — 24 detailed pages, in fact. But there’s one category to which the SEC dedicates merely 64 words: “Other Events” or
OE. The broad definition of OE news is “[that] not otherwise called for by this form [8-K], that the registrant deems of importance to security holders.” These instruc- tions are flexible enough to leave the door open for manipulation. Qin and his colleagues inves- tigate three questions. First, do firm managers manipulate Other Events? Yes, they do, particularly for “intangible” topics — hard to verify non-financial information. For example, a pharmaceutical company optimistically hints at a new clinical trial, or a company embroiled in a lawsuit, over-estimates a favorable resolution. Second, does the manipulation mislead small investors? It does. Individual investors trade strongly in accordance with the tone of “Other Events”. The more positive the tone, the more investors buy, and the more prices inflate. Because this reaction reflects potentially misleading information, the researchers find prices reverse long-run, hurting investors trading on OE. Third, why do firms strategically manipulate the tone when reporting Other Events? To gain from tempo- rarily inflating the stock price. For
example, managers can use positive tones in Other Events to temporarily drive stock prices up and increase the value of stock used to pay for merger deals. In contrast, sophisticated institutional investors do not appear to be swayed by “the tone of Other Events” — highlighting an important inequality in the markets which challenges the protection of investors. If the SEC doesn’t pay attention to this inequality and with the ambiguity of the OE rules, then there’s little legal recourse for shareholders and little risk for companies. Accordingly,
investor education is the only remaining course of action. Buyer Beware. HM
Harbert Magazine, Spring 2025 9
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