When workers catch a flu, corporate disclosure catches a cold

Managers take a longer-term approach to corporate forecasts when an organisation and key stakeholders are beset by higher levels of flu activity

There are around a billion cases of seasonal influenza around the world annually. In addition to being an ongoing and significant public health concern, the flu can also have a significant impact on organisations and workplaces through increased employee absenteeism and reduced productivity. Projected lost earnings due to the flu in the US alone have been estimated to cost US$16.3 billion annually, while the total economic burden of annual influenza epidemics amounts to US$87.1 billion.

One of the main contributors to such costs is time off work. Up to 75 per cent of employees have missed work when they had the flu or a flu-like illness, and the average time off work was usually 2–3 days each time they were sick. In addition, the research found most employed adults who were caregivers for someone else with the flu said that they missed work to care for someone else for an average of 1–2 days.

The flu can have knock-on effects within organisations which have important implications for shareholders, investors, analysts and other key stakeholders, according to research conducted by Dr Leonard Li, a Senior Lecturer in the School of Accounting, Audit & Tax at UNSW Business School. Dr Li recently co-authored a research paper that examines how constraints on corporate information production affect disclosure policies using influenza epidemic data.

His initial interest in the research was piqued by an influential research paper that reviewed the literature on investors’ information processing cost. It concluded that investors’ capacity to process information is constrained by their need to allocate time and effort across various activities.

“We know that producing good quality information is not cheap. It is time-consuming and labour-intensive, requiring the coordination of information input and collaboration from different ranks and functional units of the firm’s employees,” said Dr Li. He explained that the research team decided to use local flu activity as the basis for their study because it is empirically difficult to get large-sample data of the time spent on working or absenteeism rate within each firm. He also noted that flu is a major cause of lost work time and effort because it imposes staffing constraints on firms when employees take sick leave or work while ill, care for infected family members, or cover sick colleagues. “Thus, we use local flu activity to proxy the information production constraints,” he said.

Research catalyst and approach

The paper, Flu Fallout: Information Production Constraints and Corporate Disclosure, found that firms in areas with higher flu activity are less likely to issue short-run earnings forecasts and more likely to issue long-run earnings forecasts. Co-authored by Professor Chen Chen from Monash Business School, Professor Louise Yi Lu from Australian National University and Associate Professor Rencheng Wang from Singapore Management University, the research paper suggested that managers do not simply avoid issuing forecasts in response to information production constraints brought about by events such as increased flu activity. Instead, they shift the forecast horizon from short-run to long-run, appearing to balance the costs of issuing low-quality forecasts with those of not issuing forecasts at all.

Read more: Four ways COVID-19 affects CSR reporting (and what to do about it)

The research, which analysed a sample of 86,483 firm-quarter observations from 2003 to 2018, uncovered some key findings, according to Dr Li. Firstly, he said it found that managers react strategically to information production constraints in a way that minimises their reputation concerns while meeting investors’ information demands. “Specifically, they provide longer-horizon management forecasts (less likely to issue short-horizon forecasts and more likely to issue long-horizon forecasts) as they have more opportunities to revise and correct errors in long-horizon forecasts,” he said.

After this strategic adjustment in forecast style, Dr Li said the quality of short-horizon forecasts does not significantly change, but the quality of long-horizon forecasts decreases when faced with high local flu activities. Importantly, he noted that simply delaying the earnings announcement date cannot offset the negative effects of flu activity on forecast quality.

“Our results are consistent with the view that managers are mindful of the costs associated with issuing low-quality forecasts and not issuing any forecasts and make a strategic trade-off in selecting forecasts to reduce both types of costs,” the researchers noted in their paper.

Practical implications, insights and recommendations

The results of the research suggest that failure to maintain good employee health conditions can have significant economic consequences in terms of the quality of the information a firm produces, Dr Li explained.

“It would be a good idea to invest more in supporting employee health to lower the levels of infectious diseases, as it helps with both employees’ productivity in the labour market and information quality in the stock market. These findings are translatable to other countries, having implications not just for a decline in productivity but a deteriorated information quality in the stock market,” he said.

An important insight for investors from the paper is that when managers are also faced with information production constraints, Dr Li said they may strategically sacrifice the quality of some information to save the quality of other information. “Identifying their information constraints (imposed by flu or other factors) as well as their potential strategy is important for getting an information advantage in the market,” he said.

In response, Dr Li recommended firms take preventative actions in order to avoid the potential negative impact flu activity could have on corporate disclosure. “One of the things a firm can do is to have a better wellness program. It is documented that employees in firms with better corporate wellness programs are less likely to be negatively affected by flu,” said Dr Li. If teams have already been affected by flu or other pressures, he said the best strategy that managers can take seems to be shifting the horizons of their forecasts to longer ones, as they could have more chances to correct any potential errors later.

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The researchers concluded in their paper: “We encourage investors, policymakers, and researchers to remain attentive to strategic managerial decisions in the context of influenza and other epidemics in the United States and other countries.”