NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Lazy Prices

Lauren Cohen, Christopher Malloy, Quoc Nguyen

NBER Working Paper No. 25084
Issued in September 2018, Revised in March 2019
NBER Program(s):The Asset Pricing Program

Using the complete history of regular quarterly and annual filings by U.S. corporations from 1995-2014, we show that when firms make an active change in their reporting practices, this conveys an important signal about future firm operations. Changes to the language and construction of financial reports also have strong implications for firms’ future returns: a portfolio that shorts “changers” and buys “non-changers” earns up to 188 basis points in monthly alphas (over 22% per year) in the future. Changes in language referring to the executive (CEO and CFO) team, regarding litigation, or in the risk factor section of the documents are especially informative for future returns. We show that changes to the 10-Ks predict future earnings, profitability, future news announcements, and even future firm-level bankruptcies; meanwhile firms that do not make changes experience positive abnormal returns. Unlike typical underreaction patterns in asset prices, we find no announcement effect associated with these changes–with returns only accruing when the information is later revealed through news, events, or earnings–suggesting that investors are inattentive to these simple changes across the universe of public firms.

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Document Object Identifier (DOI): 10.3386/w25084

 
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