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    Lazy Prices
    19 Nov 2018Working Paper Summaries

    Lazy Prices

    by Lauren Cohen, Christopher J. Malloy, and Quoc Nguyen
    The most comprehensive information windows that firms provide to the markets—in the form of their mandated annual and quarterly filings—have changed dramatically over time, becoming significantly longer and more complex. When firms break from their routine phrasing and content, this action contains rich information for future firm stock returns and outcomes.
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    Author 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 US corporations from 1995 to 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: September 2018
    • HBS Working Paper Number: NBER Working Paper Series, No. 25084
    • Faculty Unit(s): Finance
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    Lauren H. Cohen
    Lauren H. Cohen
    L.E. Simmons Professor of Business Administration
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    Trung Nguyen
    Trung Nguyen
    Assistant Professor of Business Administration
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