How Financial Reporting Affects Consumers

IT’S NOT PART OF MARKETING 101, but the next uptick in your firm’s sales could be in the days after its earnings announcement. In the 10 days after an earnings announcement, publicly held firms see an average increase of 1.1% in consumer footfalls at their brick-andmortar stores and in online sales, according to a recent research paper by Wharton accounting professor Christina Zhu along with Stanford University accounting professor Suzie Noh and MIT Sloan School professor of management and accounting Eric C. So.

The paper, titled “Financial Reporting and Consumer Behavior,” noted that the footfall increase is more pronounced for firms with “extreme negative or positive earnings surprises that are more likely to garner coverage from the financial press.”

The upshot of the research is that “earnings announcements serve a marketing function by drawing attention to firms, and that a byproduct of the financial reporting process is that it shapes consumer behavior.” The paper added that it “yields important insights for research on investor attention, consumer behavior, and recurring events.”

According to Zhu, the study has implications for the fundamentals of firms as well. “If consumers pay attention to financial reports, then the firms that create these reports and decide how to disseminate them should know that, because that can actually impact how well the firm does in the long run,” she said. “It’s another form of marketing.”

One telling case study in the paper tracked fashion retailer Ralph Lauren’s average store visits after its earnings announcement on July 31, 2018. Consumer foot traffic at Ralph Lauren stores increased in the week after this earnings announcement, where the company beat the analyst consensus with “a positive earnings surprise,” the paper stated. That uptick was short-lived and partly dissipated shortly after, suggesting that the announcement triggered “a transitory increase in consumer activity.”

While Ralph Lauren reported a surprise earnings bump, the paper also found increases in store-level foot traffic for firms with negative earnings surprises. “Those firms get a lot of attention from the media when they have worse-than-expected earnings,” Zhu said.

Specifically, the research found that daily store visits on average increased by approximately 2% during the 3-6 day period after the announcement, and by 1.6% during the 7-10 day period after the announcement. “Firms with larger upticks in post-announcement foottraffic subsequently report higher sales in their next earnings announcement,” the paper stated.

Those findings were based on a study of GPS coordinates of consumers’ smartphones across the U.S. between January 2017 and February 2020. The main data sample covered 50 million observations of foot traffic at 223,943 unique establishments over three weeks surrounding 2,485 earnings announcements by 222 firms. The firms in the sample were mostly in retailing (63%), accommodation and food service (22%), and wholesale trade (8%).

The store-level data came from SafeGraph, a provider of global data on consumer traffic at physical locations; it tracked about 13% of the U.S. population. For tracking online sales, the study used transaction data from Comscore, a media measurement and analytics services provider.

The findings revealed a relatively small uptick in foot traffic. “We don’t expect the uptick to be large, because it’s important to think about who the financial reports are going to affect,” said Zhu. “It’s going to be people are reading financial news or see financial news on social media. Out of that set, the consumers who change their behavior likely have the disposable income and time to change their shopping. They don’t necessarily read the announcement of the firm directly, but they could be reading The Wall Street Journal or browsing their Twitter feeds.”

Linking Consumer Activity to Earnings Releases

In deciding to undertake this study, the authors were motivated by the idea that firms get increased attention when they make earnings announcements. “Consumers are attentionconstrained and should be more likely to visit stores of brands they recognize and can easily recall to mind,” the paper stated. “Therefore, they may patronize businesses that are more salient due to increased attention that accompanies earnings announcements.”

In addition to exploring he relationship between consumer activity and the financial reporting process among publicly traded firms, the research also highlighted the “feedback effects of the financial reporting process,” the authors noted in their paper. That may hold a cue for firms to leverage their earnings announcements in new ways. “Specifically, our results suggest that consumers increase consumption activity for firms with more attention-grabbing earnings news, indicating that managers may prefer to spotlight their earnings news as a means to increase subsequent consumer activity,” they wrote.

Firms do not appear to be directly using earnings announcements as sales triggers. “What we don’t think is going on is firms timing national advertising campaigns with the earnings announcement,” said Zhu. The authors analyzed data from Nielsen Ad Intel, “and we don’t see any uptick in national TV ads around these earnings announcements,” she added. However, she noted that “personalized or retargeted advertising likely indirectly increases around announcements, as consumers paying attention to earnings increase their Google searches for the announcing firm and see ads as a consequence.”

Prior research has explored the impact of earnings announcements on investors, managers and regulators, but research that links financial reporting and consumer behavior is scarce, the paper noted. One reason for that could be that most financial releases provide firm-level sales data at “low frequencies” such as quarterly results, it added. But the paper’s authors overcame those challenges by using data that provided a high level of granularity, revealing variations in consumer foot traffic daily and by geographic location.

For instance, the data could reveal how many individuals visited the Best Buy store on East Charleston Road in Mountain View, California, on a given date and the average duration of their visits, the paper pointed out. For some tests in the study, the authors used U.S. Census data on county-level demographics. “The census data allow us to observe that likely consumers located near Best Buy in Mountain View are predominately college educated or above and affluent,” they wrote.

Noteworthy Subtrends

Zhu and her co-authors found several noteworthy trends in parsing the data. Significantly, the higher foot traffic was concentrated in areas having a greater representation of Englishspeaking households. This finding showed that “financial reporting disproportionately affects foot traffic in populations more likely to consume financial news,” the paper noted. Consumers in areas with moderate levels of education and income also exhibited that trend, suggesting they “likely have highly elastic demand for the products and services of our sample firms and therefore are more likely to respond to their earnings news,” they wrote.

According to the authors, their study is “among the first to show heterogeneous effects of financial reporting across populations based on race/income/education, suggesting that financial reporting shapes consumption by disproportionately impacting populations more likely to consume financial news.”

The increase in consumer foot traffic was also higher for firms that sell durable goods like cars or household appliances and reported strong financial positions. “Our results suggest consumers update their expectations about firms’ solvency based on financial reports and adjust their behavior accordingly,” Zhu and her co-authors wrote. That finding is consistent with evidence in prior research that consumers avoid buying durable goods from firms that may not be able to provide warranties, spare parts, or maintenance, they added.

According to the paper, the findings also address questions about the role of other factors in those foot-traffic increases. One, since higher foot traffic after earnings announcements results in increased quarterly consumer purchases, it is clearly not a pulling-forward of sales that would have taken place further into the future. Two, they mitigate concerns that the increased foot traffic is driven by employee stock grants by firms sales events or promotions; they also “do not appear to be explained by variation in advertising campaigns coinciding with earnings announcements.”

The SafeGraph data has some inherent limitations such as its coverage of only consumers with smartphones and those that may visit brick-and-mortar stores, the paper noted. The study also dropped firms in industries where consumer visits are not likely to be discretionary, such as utilities, finance, agriculture, health care and pharmaceuticals.