A new study from faculty members at the University of Georgia’s Terry College of Business and J.M Tull School of Accounting looks into why CEOs delay the release of bad news.
John Campbell, an associate professor of accounting at Terry College, seeks to understand more about why CEOs might resist communicating bad news to shareholders, and the possible negative effects this could have for their careers. Together with Terry College professor Stephen Baginski, Terry Ph.D. candidate Lisa Hinson and past Terry Ph.D. graduate David S. Koo (now at the University of Illinois Urbana-Champaign), Campbell has co-authored a paper entitled “Do Career Concerns Affect the Delay of Bad News Disclosure?”
The research indeed finds that a CEO may withhold bad news from shareholders for fear of getting fired or being viewed negatively. Past research of this phenomenon discovered that the withholding of bad news seemed to cease after passage of Regulation Fair Disclosure (Reg. FD) in 2000, which requires CEOs to disclose any company news to all investors at the same time.
However, despite the belief that this act ended the withholding of bad news, the researchers at Terry found that it had not entirely eliminated this problem. Rather than release bad news, CEOs after 2000 began to change the way they forecasted earnings, providing more of a wide estimate of earnings than before. After Reg. FD, CEOs also seemed more likely to announce the earnings of the previous quarter at the same time as the next quarter’s forecasts, which seems to suggest that they were attempting to combine good news with bad to protect their jobs.
The faculty and research support at Terry additionally looked into factors that can help encourage CEOs to report bad news sooner, the primary solution being found in severance pay. According to the research, when a CEO can ensure that they are protected by top-level severance pay should they lose their job, they are much more likely to open up about failures. And while this could be a potentially costly investment, the level of transparency that would result would make for increased conditions among investors and within the company.