Lazy Prices

77 Pages Posted: 14 Aug 2010 Last revised: 21 Mar 2018

Lauren Cohen

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

Christopher J. Malloy

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

Quoc Nguyen

University of Illinois at Chicago - Department of Finance

Date Written: February 22, 2018

Abstract

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. 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 appear to be ignoring these simple changes across the universe of public firms.

Keywords: Information, predictable returns, annual reports, lazy investors

JEL Classification: G12, G14, G02

Suggested Citation

Cohen, Lauren and Malloy, Christopher J. and Nguyen, Quoc, Lazy Prices (February 22, 2018). 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 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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