Lazy Prices

53 Pages Posted: 14 Aug 2010 Last revised: 27 Nov 2016

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Quoc H. Nguyen

University of Illinois at Chicago - Department of Finance

Date Written: February 10, 2016

Abstract

We explore the implications of a subtle “default” choice that firms make in their regular reporting practices, namely that firms typically repeat what they most recently reported. 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 the firm. Changes to the language and construction of financial reports have strong implications for firms’ future returns: a portfolio that shorts “changers” and buys “non-changers” earns up to 188 basis points per month (over 22% per year) in abnormal returns in the future. These reporting changes are concentrated in the management discussion (MD&A) section. Changes in language referring to the executive (CEO and CFO) team, or regarding litigation, are especially informative for future returns.

Keywords: Information, default behavior, inertia, firms, annual reports, disclosure

JEL Classification: G12, G14, G02

Suggested Citation

Cohen, Lauren and Malloy, Christopher J. and Nguyen, Quoc H., Lazy Prices (February 10, 2016). Available at SSRN: https://ssrn.com/abstract=1658471 or http://dx.doi.org/10.2139/ssrn.1658471

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher J. Malloy

Harvard Business School ( email )

Soldiers Field Road
Baker Library 277
Boston, MA 02163
United States
617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Quoc H. Nguyen

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

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