Barron’s Red Flags: Do They Actually Work?
Journal of Behavioral Finance, Forthcoming
22 Pages Posted: 21 Nov 2009 Last revised: 12 May 2011
Date Written: May 9, 2011
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.
Keywords: textual analysis, fraud, red flag phrases, Madoff
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