Lazy Prices

2020/01/28 by LAUREN COHEN, Lauren Cohen, CHRISTOPHER MALLOY +3 · 5 citations
Economics, Econometrics and Finance · Business, Management and Accounting · #Financial Markets and Investment Strategies #Corporate Finance and Governance #Auditing, Earnings Management, Governance

paper · doi:10.1111/jofi.12885

Abstract

ABSTRACT Using the complete history of regular quarterly and annual filings by U.S. corporations, we show that changes to the language and construction of financial reports have strong implications for firms’ future returns and operations. A portfolio that shorts “changers” and buys “nonchangers” earns up to 188 basis points per month in alpha (over 22% per year) in the future. Moreover, changes to 10‐Ks predict future earnings, profitability, future news announcements, and even future firm‐level bankruptcies. Unlike typical underreaction patterns, we find no announcement effect, suggesting that investors are inattentive to these simple changes across the universe of public firms.

Citations

• Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?
• The Information Content of Forward‐Looking Statements in Corporate Filings—A Naïve Bayesian Machine Learning Approach
• Large‐Sample Evidence on Firms’ Year‐over‐Year MD&A Modifications

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