Corrective Disclosure and Investor Losses in Cyclical Markets

In cyclical industries, investors rely heavily on forward-looking information. Revenue guidance, demand expectations and management commentary can materially influence how the market assesses a company’s prospects.

The key issue is not simply whether guidance later proves wrong. Forecasts are inherently uncertain. The more important question is whether previously communicated expectations remain in place after the underlying conditions have materially changed.

Management generally has access to information about orders, customer demand, inventory and operating performance before it becomes available to outside investors. Corporate disclosure helps reduce this information gap and allows investors to reassess a company’s prospects as new information emerges [1].

Where negative developments become apparent but previous guidance remains unchanged, investors may then have based their decision to invest in the share on incorrect assumptions or, at the very least, may have paid a price for that share that was only apparently fair. The timing of a corrective disclosure can therefore be as important as the correction itself.

Research supports the relevance of this issue. Kothari, Shu and Wysocki examined whether managers delay the disclosure of bad news relative to good news and found evidence consistent with management, on average, delaying the release of negative information to investors [2].

European market-abuse rules also place significant emphasis on timely disclosure. Under the Market Abuse Regulation (“MAR”), information must first satisfy the conditions for inside information under Article 7 MAR: it must be of a precise nature, not made public, relating directly or indirectly to the issuer or its financial instruments, and of such a nature that, if made public, it would be likely to have a significant effect on the prices of those financial instruments. Where it does, Article 17 requires an issuer to disclose inside information directly concerning it as soon as possible [3].

This is particularly relevant where an issuer has already communicated financial objectives or expectations to the market. Under the MAR framework applicable during 2024, ESMA identified situations in which delaying disclosure was likely to mislead the public. These included circumstances where the undisclosed information was materially different from a previous public announcement, where previously announced financial objectives were no longer likely to be met, or where the information conflicted with market expectations created by the issuer’s own communications [4].

The regulatory framework has also continued to develop in this area. Recent amendments in June 2026 to Article 17 MAR have further clarified the relationship between delayed disclosure and previously communicated information, reinforcing the importance of consistency between an issuer’s public statements and subsequent disclosures. This development reflects a broader regulatory focus on ensuring that investors are not left trading on information that no longer accurately reflects the issuer’s position [5].

For investors, the practical analysis therefore goes beyond asking whether management was too optimistic. The important questions are:

·         when did the underlying deterioration become sufficiently clear and material;

·         what had the company previously communicated to the market;

·         when was that communication revised; and

·         how much of the subsequent share-price decline was attributable to company-specific information rather than wider market or sector movements.

This analytical framework can be applied to individual cases where investors assess whether a corrective disclosure followed a period in which market expectations were based on incomplete or outdated information. The STMicroelectronics matter provides one example of this analysis.

On 25 April 2024, ST reported that Automotive semiconductor demand had slowed compared with its expectations and that the ongoing Industrial correction had accelerated. The company revised its FY2024 revenue plan to between $14 billion and $15 billion [6].

On 25 July 2024, ST stated that, contrary to its prior expectations, customer orders in Industrial had not improved and Automotive demand had declined. It reduced its FY2024 revenue range further to between $13.2 billion and $13.7 billion [7].

On 31 October 2024, the midpoint of ST’s fourth-quarter outlook translated into expected full-year revenues of approximately $13.27 billion, at the low end of the range communicated in the previous quarter [8].

The central analytical question is therefore one of timing: whether the conditions ultimately reflected in those revisions had become sufficiently established at an earlier stage, while investors were still trading on the basis of the company’s previous communications.

At Martingale Risk, we analyze these situations by reconstructing the disclosure timeline, identifying potentially corrective announcements and measuring the associated market reaction. This helps determine whether a period of potential price distortion can be identified, which investors traded during that period, and whether the resulting losses can be linked to the timing and content of the information disclosed.

In cyclical markets, deteriorating business conditions are unavoidable. Whether the market was informed of those conditions at the appropriate time is a different question, and one that can be critical for investors.

This article is provided for general informational purposes only and does not constitute legal, financial or investment advice.

References

[1] Healy, P.M. and Palepu, K.G. (2001), “Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature”, Journal of Accounting and Economics, Vol. 31, Issues 1–3, pp. 405–440.

[2] Kothari, S.P., Shu, S. and Wysocki, P.D. (2009), “Do Managers Withhold Bad News?”, Journal of Accounting Research, Vol. 47, No. 1, pp. 241–276.

[3] Regulation (EU) No 596/2014 on market abuse (“MAR”), Articles 7 and 17, as applicable during the relevant period.

[4] European Securities and Markets Authority, MAR Guidelines – Delay in the Disclosure of Inside Information, ESMA/2016/1478, 20 October 2016.

[5] Regulation (EU) 2024/2809 of the European Parliament and of the Council amending Regulation (EU) No 596/2014 as regards enhancing the attractiveness of EU public capital markets; Commission Delegated Regulation (EU) 2026/789 supplementing Regulation (EU) No 596/2014 as regards disclosure of inside information in protracted processes and delay of disclosure.

[6] STMicroelectronics N.V., “STMicroelectronics Reports 2024 First Quarter Financial Results”, 25 April 2024.

[7] STMicroelectronics N.V., “STMicroelectronics Reports 2024 Second Quarter Financial Results”, 25 July 2024.

[8] STMicroelectronics N.V., “STMicroelectronics Reports 2024 Third Quarter Financial Results”, 31 October 2024.