Corporate communications teams often engage in a practice known as “getting ahead of the story,” where they strategically release positive news to soften the blow of upcoming negative financial results. This tactic, intended to manage public perception and investor sentiment, appears to be losing its effectiveness. A recent study reveals that seasoned Wall Street traders can see through these efforts, leading them to discount official company announcements and seek information from alternative sources, ultimately impacting the company’s stock value in ways the spin doctors did not intend.
This phenomenon of strategic information release creates a significant information asymmetry, particularly during a company’s periods of underperformance. Research analyzing thousands of firm-year observations found that when a company is doing poorly, the market’s reliance on official corporate disclosures for price discovery drops significantly. Investors, sensing a deliberate attempt to distract, turn to private information channels and the analysis of outside market watchers. This shift not only undermines the company’s messaging but also has broader implications for market efficiency and transparency, raising questions about the long-term viability of using positive spin to mask financial realities.
The Art of Strategic Distraction
Public relations and corporate communications departments have long employed tactics to frame company news in the best possible light. One of the most common strategies is the pre-emptive release of good news when a negative announcement is on the horizon. For example, a company might issue a press release touting a new technological innovation or a significant government contract just before releasing an earnings report that is expected to miss analyst expectations. This strategy is designed to create a positive narrative buffer, hoping that the good news will temper the market’s reaction to the bad.
The core assumption behind this tactic is that investors can be swayed by a steady stream of positive headlines, leading them to overlook or downplay the significance of negative financial data. However, this approach is becoming less effective in an increasingly sophisticated market. Professional traders and analysts are conditioned to look for patterns in corporate communications. When a company that has been relatively quiet suddenly issues a flurry of positive, but often non-material, announcements, it can serve as a red flag for savvy investors, signaling that the company may be trying to hide something.
Investor Skepticism and Shifting Behaviors
The primary finding of recent research is that investors are not easily fooled by corporate spin. A study co-authored by Min Shen, an associate professor of accounting at George Mason University, analyzed corporate disclosures and stock price movements from 2003 to 2016. The research uncovered a stark difference in how the market processes information based on a company’s performance. During years when a company was performing well relative to its peers, official corporate disclosures accounted for approximately 60% of the information that influenced its stock price.
In contrast, during years of underperformance, the impact of these same types of disclosures plummeted, accounting for only 40% of price discovery. This indicates that when a company is struggling, investors become warier of official statements and press releases. They recognize that the company has a strong incentive to spin the narrative, and as a result, they treat information coming directly from the company as less reliable. This skepticism forces them to expend more resources to find credible information elsewhere.
The Power of Private Information
In the absence of trustworthy corporate announcements, investors turn to other channels to gauge a company’s true health. The research highlights the increased importance of “extreme order imbalances,” which are large, one-sided swings in buy or sell orders. These imbalances are often triggered by the sharing of private information among institutional investors and well-connected traders. During a company’s “bad” years, the influence of these private information channels on the stock price becomes more pronounced, as the market scrambles to find a reliable basis for valuation that isn’t tainted by corporate spin.
Deconstructing Corporate Announcements
The study differentiated between various types of corporate and non-corporate disclosures. Corporate disclosures include official announcements like earnings reports, management guidance, and SEC filings. Non-corporate disclosures come from external sources such as market analysts, credit rating agencies, and financial journalism. While all forms of corporate communication were viewed with more suspicion during down years, the researchers found that press releases were the primary driver of this credibility gap.
During a company’s “good” years, press releases contributed to an average of 27% of the price discovery. During “bad” years, that contribution fell to a mere 3%. This dramatic drop suggests that investors overwhelmingly view press releases from underperforming companies as marketing tools rather than sources of substantive financial information. The more a company tries to distract from its poor performance with positive press releases, the more investors seem to ignore them, rendering the strategy not only ineffective but potentially counterproductive.
The Counterbalancing Role of Market Monitors
The market has its own set of checks and balances that can help counteract corporate spin. When official channels of information are perceived as unreliable, the role of outside monitors becomes even more critical. These monitors include short-sellers, who bet against a company’s stock, equity analysts who provide independent research, and dedicated long-term institutional investors who have a vested interest in the company’s true performance. These groups have the resources and the incentive to conduct deep-dive investigations and uncover the reality behind the spin.
By publishing their findings or making significant trades based on their research, these external monitors can exert pressure on corporate management to be more transparent. Their actions can inject a dose of reality into the market, providing a competing narrative to the one the company is trying to promote. This external scrutiny serves as a crucial mechanism for maintaining market efficiency, especially when companies are actively trying to obscure their performance.
Broader Implications for Market Efficiency
The widespread use of corporate spin and the corresponding investor skepticism have significant implications for the overall health and efficiency of the financial markets. Market efficiency relies on the timely and accurate dissemination of information, which allows capital to be allocated to the most deserving companies. When companies deliberately muddy the waters with misleading or distracting communications, they interfere with this process. This can lead to inaccurate stock valuations and a misallocation of investment capital in the short term.
Furthermore, the fact that investors are increasingly relying on private information channels can create an uneven playing field. Large, well-connected institutional investors may have access to information that is not available to the average retail investor, exacerbating information asymmetry. Over time, a market that is perceived as being driven by spin and private information rather than transparent disclosures can lose the trust of the public, which can have long-lasting negative consequences for all participants.
