Research — 4 May, 2021
U.S. Filings: No News is Good News
By Frank Zhao
Highlights
Textual Consistency Matters and the Market Rewards It: Firms with the most year-over-year textual similarity outperformed those with the least similarity by 4.18% in the MD&A section and by 5.26% in the Risk Factors section annually after accounting for commonly used risk strategies.
Textual Consistency in the Auxiliary Sections Matter Too: Firms with the most similarity in the Controls & Procedures, Legal Proceedings and Quantitative & Qualitative Disclosures about Market Risk outperformed those with the least similarity by 3.09% annually after accounting for commonly used risk strategies.
Filers with the Most Consistency Exhibit Positive Earnings Surprises and Momentum: Firms with the most (least) similarity in the MD&A and Risk Factors sections were historically those that have outperformed (underperformed) over the past 12-months; have experienced positive (negative) earnings surprises; and have their growth prospects revised upwards (downwards) by sell-side analysts.
Company annual filings are a vital but often under-analyzed source of information for investors. Market moving content is buried within an ever-growing body of text that on average is equivalent to a 240-page novel. The filings contain subtle revisions making a computational linguistic approach imperative. Faced with this voluminous amount of text and the minute number of changes, investors have historically overlooked the newly embedded information and the implications of those additions.
This paper extends the first Quantamental Research paper[1] on corporate filings, which considered the Risk Factors section by exploring the five commonly shared sections between Form 10-K and Form 10-Q.[2] Key insights for the U.S. market include:
Consistency Matters and the Market Rewards It: Firms with the greatest year-over-year textual similarity outperformed those with the least similarity by 4.18% in the MD&A section and by 5.26% in the Risk Factors section annually after accounting for commonly used risk strategies (Exhibit 1).
Consistency in the Auxiliary Sections Matter Too: Firms with fewest changes in the Controls & Procedures, Legal Proceedings and Quantitative & Qualitative Disclosures about Market Risk outperformed those with the least similarity by 3.09% annually after accounting for commonly used risk strategies (Exhibit 2).
Supplementing the textual similarity scores from the Risk Factors section with those from the Quantitative & Qualitative Disclosures about Market Risks and Controls & Procedures sections improved the historical performance of the active long-side of the strategy to 2.37% from 1.75% annually with a better risk-and-reward profile (Exhibit 2).
Filers with the Most Consistency Exhibit Positive Earnings Surprises and Momentum: Firms with the most (least) similarity in the MD&A and Risk Factors sections were historically those that have outperformed (underperformed) over the past 12-months; have experienced positive (negative) earnings surprises; and have their growth prospects revised upwards (downwards) by sell-side analysts. (Exhibit 3).
Even Small Textual Inconsistency Matters for Performance and Volatility: Strategies that purchased firms with extreme similarity and sold those with extreme dissimilarity had higher cumulative dollar growth historically without taking on additional risk (Exhibit 5).
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