Companies Talk More Clearly When Business Is Booming

Based on research by K. Ramesh, Edward Xuejun Li (CUNY), Min Shen (George Mason) and Joanna Shuang Wu (Rochester) 

Key findings: 

• During good news years, corporate disclosures explain over 60% of stock price movement; during bad years, they explain only 40%.
• Firms issue about the same number of voluntary press releases in good and bad years, but during good years they account for 27% of annual price discovery; in bad years only 3%.
• While press releases lose influence during down times, SEC-required reports gain influence, increasing their share of price discovery from 7% to 17%. 

Imagine you’re an investor reading a company’s Q2 earnings report. The numbers seem fine — not great, but not catastrophic. Then you notice the firm’s recent messaging: an upbeat press release highlighting a modest partnership; a social media post touting “momentum”; a sudden insider share purchase. Taken together, it feels like the company might be elevating good news to soften the impact of a disappointing corporate disclosure.

Past studies have shown there’s something to this feeling — that managers sometimes try to hide bad news by releasing unrelated, positive announcements around the same time.

But new research in The Accounting Review looks beyond one-off announcements to examine how companies communicate over an entire year when their aggregate performance is strong versus when it’s weak. Co-authored by Rice Business accounting professor K. Ramesh, the study also tracks a broader set of communications than past studies — from press releases to insider sales to SEC filings — and finds a clear pattern: In good news years, corporate disclosures play a bigger role in shaping stock prices than bad news years, when investors are more likely to rely on information they gather themselves.

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When Tough Times Call for Good Headlines

Ramesh and his coauthors — Edward Xuejun Li (CUNY), Min Shen (George Mason) and Joanna Shuang Wu (Rochester) — likely provide the first evidence that in weak performance years, companies tend to release market-moving good news to offset an overall negative trend.

Using an updated version of a classic 1968 method by Ray Ball and Philip Brown, the researchers tracked various types of disclosures — including press releases, earnings announcements, and SEC filings — and measured how much each contributed to price discovery over the course of a year. (“Price discovery” is the market’s process of figuring out what a stock is really worth based on available information.) 

In years when firms perform well, they found that corporate disclosures do what they’re supposed to: shape investor understanding, explain performance and guide stock pricing. But in years when performance is down, that same flow of information is just as frequent — but significantly less useful.

Specifically, they find that when news is good in the aggregate, public disclosures explain over 60% stock price variation. In bad news years, that rate drops to about 40%.

The disparity isn’t because firms are saying less, says Ramesh. But they do become more selective about what they disclose and when. As business performance deteriorates, disclosures can shift from simply informing to also shaping a more positive narrative.

This pattern shows up clearly in how managers use different channels for disclosure. In good news years, for example, voluntary press releases are a major source of information, contributing 27% to price discovery. In bad news years, however, their impact drops to just 3%. And while press releases lose influence during down times, annual and quarterly reports required by the SEC become more important, increasing their share of price discovery from 7% to 17%. 

Measuring What’s Said — and What’s Not

The Accounting Review paper also looks at other signals investors turn to for guidance, especially when communication becomes more guarded.

For example, insider sales offered researchers another cue on news offsetting. In good years, insider purchases send a strong positive signal to the market — and in bad years, those same purchases can more than outweigh the negative impact of insider sales.

“Markets compensate for managerial silence,” says Ramesh. “When companies choose not to tell the whole story, investors find ways to piece it together.”

The most striking pattern wasn’t in what companies said — or left unsaid — but in how investors reacted. When managers grew more guarded, investors dug deeper. Using a measure called “extreme daily order flow imbalance,” which tracks periods of heavy one-sided trading, the researchers found that private information gathering played a far bigger role in bad years. These imbalances accounted for 11% of price discovery in those years, compared with almost no effect in good years.

In other words, when companies went quiet, investors got loud. “Markets compensate for managerial silence,” says Ramesh. “When companies choose not to tell the whole story, investors find ways to piece it together.”

Shifting the Lens on Corporate Disclosure

The research offers a nuanced analysis of the evolving interplay between corporate disclosures and the mechanisms of price discovery. Transparency isn’t just in what firms say, but in how their performance influences the messages they share.

For board members, analysts, investors and regulators, the message is clear: When a firm mixes in more than its fair share of good news during bad years, it may be signaling more than it’s saying outright.

Written by Scott Pett

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Li, Ramesh, Shen, and Wu. “Running without Moving? Corporate Disclosure and Annual Price Discovery in Bad versus Good Times.” The Accounting Review 100.4 (2025): 357–384. https://doi.org/10.2308/TAR-2023-0504.