HQS Delays Earnings: No News Could Be Bad News

Mar.20.11 | About: HQ Sustainable (HQSM)

HQ Sustainable Maritime Industries, Inc. (HQS) is a producer of tilapia and nutraceuticals with production facilities in China but management in the United States and sales throughout North America, Europe and Asia. I wrote about why I think HQS is undervalued here. On March 16, the company announced that it would be delaying its earnings report for two weeks:

HQ Sustainable Maritime Industries, Inc. (the “Registrant”) is unable to file its Report on Form 10-K for the year ended December 31, 2010 within the prescribed time period due to delays in compiling the information for the preparation of the financial statements. The Registrant fully expects to be able to file within the additional time allowed by this form.

The market responded swiftly, knocking HQS down 23%. Is this an overreaction? According to a recent study, it may be:

This study examines managers’ decision to disclose a delay in the reporting of earnings and the resulting market reaction. Based on a hand-collected sample during the period 1995-2006, we find that earnings delay announcements (EDAs) occur relatively infrequently, but are associated with statistically and economically significant declines in firm value. … For the small number of EDAs for which no reason is provided for the delay, the average one-day abnormal return is -10.28 percent and suggests that investors, when not provided a reason for an earnings delay, assume the worst.

Read the full study here.

Disclosure: Long HQS