When companies are looking at bad earnings news, a new study from the University of Iowa suggests it's best to remember what we learned as kids.

"If a child does something wrong and tells his mother about it, he'll probably be in less trouble than if mom finds out about it on her own," says Richard Mergenthaler, an accounting professor in the Tippie College of Business.

Likewise, Mergenthaler's new study finds that the earlier a firm announces bad earnings news, the less likely it will be sued by unhappy shareholders. In fact, his research found that companies that wait until the last few weeks of a quarter to announce they won't meet analysts' earnings expectations are 45 times more likely to face shareholder lawsuits than firms that make the announcement early.

"The earlier a company communicates the information to the market, the better off they'll be," says Mergenthaler, whose study "The Timeliness of Earnings News and Litigation Risk."

Avoiding earnings-related shareholder lawsuits has huge financial implications. From 1996 to 2005, U.S. firms shelled out more than $15 billion in settlements for securities-related class-action lawsuits, and billions more fighting suits that didn't make it to settlement.

Firms that are sued by shareholders also suffer an enormous cost to their reputations, Mergenthaler says, so avoiding such suits helps companies' bottom lines.

Mergenthaler and his co-researchers looked at 423 companies that were sued between 1996 and 2005 by shareholders after reporting lower earnings than expected by analysts. They then found 423 companies that reported similar earnings news during the same quarter but weren't sued, then looked to see when analysts became aware of the situations.

They found that most firms that were sued waited until near the reporting date to announce that they expected to miss forecasts. Non-sued firms consistently reported bad earnings news earlier.

"At the halfway point of the quarter, more than 55 percent of the bad news is revealed on average for non-sued firms, compared to less than 25 percent for sued firms," Mergenthaler says.

Mergenthaler suspects there are two reasons for this. First, when releasing bad news earlier, the market has time to digest the news before the earnings actually are released and the firm's stock doesn't suffer as much of a price shock.

The earlier release date also diminishes the likelihood that stockholders will interpret poorer-than-expected earnings as a sign of management fraud, and doesn't provide evidence that attorneys could use to accuse management of fraud.