Lazy Prices

90 Pages Posted: 14 Aug 2010 Last revised: 28 Mar 2019

See all articles by Lauren Cohen

Lauren Cohen

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

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER); Arrowstreet Capital, LP

Quoc Nguyen

DePaul University

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2019

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; meanwhile firms that do not make changes experience positive abnormal returns. 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 are inattentive to these simple changes across the universe of public firms.

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

JEL Classification: G12, G14, G02

Suggested Citation

Cohen, Lauren and Malloy, Christopher J. and Nguyen, Quoc, Lazy Prices (March 7, 2019). 2019 Academic Research Colloquium for Financial Planning and Related Disciplines, Available at SSRN: https://ssrn.com/abstract=1658471 or http://dx.doi.org/10.2139/ssrn.1658471

Lauren Cohen (Contact Author)

Harvard University - Business School (HBS) ( email )

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Christopher J. Malloy

Harvard Business School ( email )

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Quoc Nguyen

DePaul University ( email )

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Chicago, IL 60604
United States

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