Companies Have to Promptly Disclose Their Borrowing. Many Don’t.

A study conducted by researchers at the Anderson School of Management at the University of California, Los Angeles, found that publicly traded U.S. companies failed to promptly disclose 18% of loans between 2005 and 2017 in a Form 8-K with the SEC as required. Form 8-K is used to report material developments in companies’ finances between quarterly or annual reports.

“This is pretty clear evidence that companies selectively comply with regulations to disclose” loans, says Judson Caskey, an associate professor of accounting at Anderson, who co-wrote the study.

The researchers examined data from 13,628 loan agreements for 2,766 companies from the DealScan database between 2005 and 2017. DealScan collects loan information directly from borrowers and lenders as well as SEC filings.

Better late than never?

Among the 18% of loans that weren’t disclosed in 8-Ks as required, 75% eventually were reported later, in a quarterly 10-Q or annual 10-K form, the researchers found.

But even if the loans are eventually reported this way, that not only delays disclosure, says Dr. Caskey, it also reduces scrutiny of the loan terms, as shareholders and analysts focus on other information in those bulky regular filings.

Worse yet, 25% of the loans that weren’t disclosed in 8-Ks—or 4.5% of all the deals studied—were never disclosed, the researchers found.

Evidence suggests that nondisclosure is often a tactical decision, not a benign oversight, the researchers say. Companies more often skip required disclosure for loans with unfavorable terms, and companies with an array of Wall Street analysts scouring their finances are less likely to skip timely disclosures, the researchers found.

Stock impact

In addition, they found evidence that companies that don’t disclose loans as mandated enjoy higher stock returns in the month following the loan issuance than those that follow the rules. “Some people may be buying shares at too high a price” when loans aren’t disclosed, Dr. Caskey says, because the share price doesn’t reflect these companies’ increased debt.

This stock outperformance reverses by the third month after loan issuance, the researchers found, which they say may reflect the borrowing even though the loan isn’t disclosed. “The equity market could be reacting to other information related to the loan, such as asset acquisition or liquidity problems,” they say.

There appears to be little regulatory risk to skipping disclosure, the researchers say. They examined 12,735 comment letters that borrowers in their sample received from the SEC within 12 months of the issuance of loans occurring during their study period, and found that only one letter referred to the failure to file an 8-K disclosure of a loan deal.

The SEC declined to comment.

Ms. Maxey is a writer in Union City, N.J. She can be reached at [email protected].