The strategy involves analyzing US stocks’ 10K & 10Q reports, categorizing them based on textual changes in “Risk Factors,” and going long on “NoChangers” and short on “Changers” for three months.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Lazy
I. STRATEGY IN A NUTSHELL
The strategy targets US stocks listed on NYSE, AMEX, and Nasdaq by analyzing textual changes in the “Risk Factors” section of 10K and 10Q filings over the past two periods. Using the Sim-Jaccard test, stocks are classified into five quantiles based on similarity scores, creating a “Change/NoChange” metric. The strategy goes long on “NoChangers” and short on “Changers” for three months, with equal weighting per stock. The portfolio is rebalanced monthly, adjusting one-third of holdings each month.
II. ECONOMIC RATIONALE
Stock prices often lag behind financial report releases due to the high volume of filings and increasing non-numerical content. Analysts struggle to isolate critical information from the “white noise.” By focusing on textual changes—rather than absolute tone—this strategy detects shifts in management’s disclosure of risks. Changes in wording signal management’s awareness of potential challenges, which the market may initially overlook. Empirical results suggest that this approach, particularly using the Risk Factors section with the Sim-Jaccard method, delivers excess returns (1.88%) and can outperform traditional long/short portfolios.
III. SOURCE PAPER
Lazy Prices [Click to Open PDF]
Cohen, Harvard Business School and NBER; Malloy, Harvard Business School and NBER; Nguyen, DePaul University
<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.
IV. BACKTEST PERFORMANCE
| Annualised Return | 18.58% |
| Volatility | 26.72% |
| Beta | N/A |
| Sharpe Ratio | 0.7 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
