Working Paper: NBER ID: w25084
Authors: Lauren Cohen; Christopher Malloy; Quoc Nguyen
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: reporting practices; financial reports; future returns; investor inattention
JEL Codes: G02; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in reporting practices (G38) | Future operational outcomes (L21) |
| Changes in reporting practices (G38) | Future returns (G17) |
| Changes in language in reports (C80) | Future abnormal returns (G17) |
| Firms that do not change reports (L20) | Positive abnormal returns (G19) |
| Changes in 10-K filings (G38) | Future earnings and bankruptcy risks (G33) |
| Lack of immediate announcement effects (G14) | Investor inattention to reporting changes (G14) |
| Changes in management discussion and analysis (MDA) (G38) | Significant abnormal returns (G14) |
| Changes in reporting practices (G38) | Negative returns (G12) |