Barron’s Red Flags: Do They Actually Work?
University of Notre Dame
University of Notre Dame - Mendoza College of Business - Department of Finance
May 9, 2011
Journal of Behavioral Finance, Forthcoming
Investors are often concerned that managers might hide negative information in filings. With advances in textual analysis and widespread document availability, individuals can now easily search for phrases that might be red flags indicating questionable behavior. We examine the impact of 13 suspicious phrases identified by a Barron’s article in a large sample of 10-Ks. There is evidence that phrases like unbilled receivables signal a firm may subsequently be accused of fraud. At the 10-K filing date, phrases like substantial doubt are linked with significantly lower filing date excess stock returns, higher volatility, and greater analyst earnings forecast dispersion.
Number of Pages in PDF File: 22
Keywords: textual analysis, fraud, red flag phrases, Madoff
Date posted: November 21, 2009 ; Last revised: May 12, 2011
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