Jian Cao, Florida Atlantic University professor, comments on the interplay between securities law and the capital markets.
Much like individual taxpayers race against the clock to pay income tax on time to the Internal Revenue Service each year, companies are on deadline to file the required comprehensive summary of their financial performance with the US Securities and Exchange Commission called a Form 10-K.
Whether a company makes that deadline or files late tells us a lot. Timeliness of filings is an important characteristic of relevant information and is one of the determinants of security prices and warning signs leading to securities litigation.
Recently, Citizens, Inc. received an expected NYSE Notice on April 3rd that it was not in compliance with the exchange's continued listing requirements as a result of its failure to timely file its 2016 Form 10-K. On April 11th Scott+Scott, Attorneys At Law, LLP announced filing of a securities class action lawsuit against Citizens, Inc., claiming the company's statements about its business, operations, and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.
A study I recently conducted with my coauthors, Julia Higgs at Florida Atlantic University and Feng Chen at the University of Toronto, found that failure to file a periodic report on time may be a sign of trouble, especially if accounting/auditing issues are cited as a cause of delay.
Our study revealed evidence that firms requesting a filing extension for Form 10-K had higher incidences of subsequent restatements and SEC enforcement actions. Although the disclosed reasons (accounting issues, inability to complete report, distress & restructuring, control issues, and regulatory affairs) reveal some issues about late filers, the risk of low reporting quality persists even when the explanations are more innocuous.
As of the stock market's close on Thursday, April 20th Citizens' shares have fallen $1.74 per share – over 21% – since its March 17th filing for an extension with the SEC. Understanding what happens to late filers is important, as investors are clearly being harmed.
(Source: Florida Atlantic University College of Business)
