COVID-19 Profit Warnings: Delivering Bad News in a Time of Crisis

Abstract

Profit warnings (large negative earnings surprises) are important corporate reporting documents for delivering bad news and a distinctive corporate communication genre. The 2020 COVID-19 exogenous shock provides a unique worldwide crisis context for company disclosure of bad news. The research develops a genre-based typology/analytical framework for assessing COVID-19 profit warnings’ quality comprising: (1) Four profit warning/forecast quality characteristics and (2) Eight profit warning/forecast disclosures. For a sample of 160 profit-warning documents, the research manually analyses their content, culminating in a disclosure quality score/index. The research tests a model of the factors influencing disclosure quality. The research finds companies regress to silence when investors most need guidance and poor-quality disclosure, coy ambiguous language, possibly reflecting minimal regulatory guidance on this form of corporate report. Two variables are significant – Profit warnings disclosed following Financial Reporting Council guidance are of higher quality and quality varies by industry. The paper finds faux disclosure and the performativity of disclosure, which may allow boards of directors to tick-box compliance with market abuse regulations. The paper concludes with recommendations for policymakers on improvements required to enhance the quality of these highly important corporate documents.