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Publications
  • June 2020
  • Article
  • Journal of Finance

Lazy Prices

By: Lauren Cohen, Christopher J. Malloy and Quoc Nguyen
  • Format:Print
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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 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.

Keywords

Default Behavior; Inertia; Firms; Disclosure; Information; Business or Company Management; Behavior; Annual Reports; Corporate Disclosure; Financial Reporting; United States

Citation

Cohen, Lauren, Christopher J. Malloy, and Quoc Nguyen. "Lazy Prices." Journal of Finance 75, no. 3 (June 2020): 1371–1415. (Winner of the First Prize, Chicago Quantitative Alliance Academic Paper Competition, 2016. Winner of the Jack Treynor Prize for superior work in the field of investment management and financial markets, sponsored by the Q-Group,The Institute for Quantitative Research in Finance, 2016. Winner of the Hillcrest Behavioral Finance Prize, 2016.)
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About The Author

Lauren H. Cohen

Finance
→More Publications

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More from the Authors
  • (Family) Size Matters: Nico Oprée and the Decreasing Power of Family Unity over Time By: Lauren Cohen, Octavian Graf Pilati, Dominik V. Eynern and Sophia Pan
  • 'Net Zero in Action': Impact Investing at the McKnight Foundation By: Lauren Cohen, Christina R. Wing and Sophia Pan
  • The Micro-Family Office: Aamir Rehman By: Lauren Cohen and Sophia Pan
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