Quant Macro Investing

Risk Taking Disciplined

Barron’s Red Flags: Do They Actually Work?

Barrons Red Flags: Do They Actually Work?

Tim Loughran
University of Notre Dame

Bill McDonald
University of Notre Dame

November 20, 2009

Investors are often concerned that managers might hide negative information in the maze of mandated SEC filings. With advances in textual analysis and the availability of documents on EDGAR, individuals can quite easily search for phrases that might be red flags indicating aggressive accounting practices or poorly monitored management. We examine the impact of 13 suspicious corporate phrases identified by a recent Barron’s article in a sample of 50,115 10-Ks during 1994-2008. There is evidence that red flag phrases like related party and unbilled receivables signal a firm may subsequently be accused of fraud. At the 10-K filing date, phrases like substantial doubt are linked with significantly lower filing date excess stock returns, higher stock return volatility, and greater analyst earnings forecast dispersion.


December 7, 2009 - Posted by | Uncategorized

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