In recent years, the proliferation of armed conflicts, a global pandemic, natural catastrophes, and other external shocks to the economy, have taken on the pattern of a continued ‘Polycrisis’. Policymakers and regulators thus face increasingly tough choices on how to ensure the continued smooth operations of markets. One issue is the balance between the provision of regulatory relief to market participants in response to an unexpected shock and the possible exploitation by firms aiming to conceal or delay information.
Hamas’ attack on 7 October 2023 and the subsequent war in Gaza provide an example of such a shock. The Tel Aviv Stock Exchange resisted calls for a closure similar to the stock exchange closures in the United States following the September 11th attacks, and regulators provided wide-reaching regulatory relief to reporting firms, allowing them to defer the publication of their financial reports. While designed to assist corporations most impacted by the war, the relief was instead utilized by smaller firms with history of last minute filings, reflecting a presumably opportunistic behavior as I show in a recent working paper.
A discretionary regulatory relief in response to war
The Tel Aviv Stock Exchange is a significant financing avenue both for Israeli firms and the Israeli government itself. It has more than 600 companies and trades in thousands of securities, indices, and derivatives with a total value of approximately USD 500 billion, making it one of the largest Middle Eastern stock exchanges.
In an op-ed, the deputy CEO of the Tel Aviv Stock Exchange noted the importance of its continued operation in order to preserve investors’ trust, portfolio liquidity, and allow the state to raise capital and recycle debts. This continued operation helps isolate the impact of the 7 October attacks on share prices and market reactions.
Responding to pressure from market participants and a call by the Israeli Accountants Association highlighting staff shortages due to the war, the Israeli Securities Authority, the country's main capital markets regulator, reacted quickly and issued an announcement regarding reporting exceptions on 16 October 2023. The most notable regulatory relief was a one-month blanket extension to the quarterly financial reporting deadline, from 30 November 2023 to 31 December 2023. During the postponement period and until the eventual publication of the Q3 reports, no new capital raises were allowed for the applicable companies. In order to utilize the extension, companies had to announce the decision before the original Q3 filing deadline.
How did firms and investors react?
Out of 416 applicable firms, 54 opted to utilize the regulatory exception, representing 13% of the applicable sample.
Notably, the immediate impact the war had on firms does not correlate with their decisions to postpone the filing of their quarterly reports. However, small firm size, being in financial distress, and a history of late financial reports filings have statistically significant associations with postponing the reports.
Accordingly, firms which chose to postpone were not necessarily those that needed the extra time due to the impacts of the war, but rather those that have exogenous issues with their reporting regime. This finding is consistent with the financial literature on late reporting.
This claim is supported by two additional data points: First, most companies announced to postpone close to the original filing deadline at the end of November and second, the majority of these firms then used the full extension period and filed on the last day of December. Finally, the fact that a significant portion of the 30 foreign companies traded on the Tel Aviv Stock Exchange chose to implement the exception raises eyebrows. These companies’ business activities are essentially all outside the state of Israel, meaning that they cannot have been directly impacted by the 7 October attacks, further indicating opportunistic behavior.
Investor Reaction to Filing Postponements Appears Limited
Despite these indications, investors have not responded significantly to postponements, as evidenced by the relatively normal distribution of abnormal returns on the postponement announcement day contained in the chart above. Notably, a no response (0%) is where much of the actual responses are concentrated. At first glance, this result is surprising. Economic theory would predict that investors punish firms for late filing.
Three possible explanations can be drawn from the data as well as existing literature on corporate disclosures:
- It is inherently difficult to assess the economic value of delayed information, especially when the delay is explicitly permitted by regulators.
- Most of the postponing firms have not shared any reasoning supporting their decisions, exacerbating the confusion.
- Even in best circumstances, it is difficult to quantify qualitative information.
Lessons for regulators facing crisis
The companies who utilized disclosure exceptions were mostly volatile and vulnerable companies, not necessarily those impacted by 7 October. Investors as need to receive timely information on developments to be able to adjust their investments accordingly. In this case, the regulatory exemption contributed to a state of intransparency and market confusion.
In the future, regulators should be cautious when allowing "blanket" or voluntary exemptions, even in response to extreme and unexpected situations. Exceptions should be well tailored and narrowly defined, aimed at rectifying the real impact of geopolitical events and disasters for affected firms, while barring the door for exploitation by unaffected entities.
The incorporation of Large Language Models (LLMs) and more AI-based tools into the categorization and processing of corporate disclosures and non-disclosures may help design and mitigate the possible negative effects of emergency regulatory relief. For example, by automatically flagging utilization of exemptions without reasons being provided, or untimely filings of reports. However, in smaller markets and those which rely on disclosures in less prevalent languages (such as Hebrew), it may still be years in the future before these tools will help inform investors effectively.
Dvir Aviam Ezra is a doctoral student of Law and Finance at SAFE.
Blog entries represent the authors’ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
