Barron’s Red Flags: Do They Actually Work?

Journal of Behavioral Finance, Forthcoming

22 Pages Posted: 21 Nov 2009 Last revised: 12 May 2011

Tim Loughran

University of Notre Dame

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance

Date Written: May 9, 2011

Abstract

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

Suggested Citation

Loughran, Tim and McDonald, Bill, Barron’s Red Flags: Do They Actually Work? (May 9, 2011). Journal of Behavioral Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1510188 or http://dx.doi.org/10.2139/ssrn.1510188

Tim Loughran (Contact Author)

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

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