Troublesome Tidings? Investors’ Response to a Wells Notice

Abstract

While the SEC has issued Wells notices for many decades, scant evidence has amassed about how such notices might affect stock prices. This study fills that void and finds significantly negative excess stock returns over the three days around first-time Wells disclosures in company 8-K filings. For first-time 8-K disclosures that involve timely subsequent litigation, stock prices fall sharply, resulting in a cumulative average three-day excess stock return of -4.5 percent. In addition, we observe no significant price response for companies that may wait to disclose their first-time Wells disclosure in a 10-K or 10-Q, which raises the possibility that some managers choose the potentially less ethical option of disclosing on a delayed basis in a 10-K or 10-Q to avoid or mute the initial 8-K effect. Our results also imply that research on SEC or shareholder litigation or restatement events may have understated investors’ response to those events by not considering the earlier Wells notice response.