Do long lags between end of firm quarterly and annual financial reporting periods and issuance of SEC-required financial reports (10-Q and 10-K) indicate internal firm inefficiencies and/or reluctance to disclose adverse performance? In their August 2019 paper entitled “Filing, Fast and Slow: Reporting Lag and Stock Returns”, Karim Bannouh, Derek Geng and Bas Peeters study the impact of reporting lag (number of days between the end of reporting period and filing date of the corresponding report) on future stock returns. They focus on firms with market capitalizations greater than $750 million that have deadlines of 40 days after quarter end for quarterly reports and 60 days after year end for annual reports (accelerated filers). They each month:
- Sort stocks into fifths, or quintiles, based on reporting lag separately for the most recent 10-K and the most recent 10-Q filings.
- Reform a portfolio that is long (short) the equal-weighted quintile with the shortest (longest) lags.
They measure risk-adjusted portfolio performance via monthly gross 1-factor (market), 3-factor (plus size and book-to-market) and 4-factor (plus momentum) alphas. Using 10-K and 10-Q filings from the SEC and monthly characteristics and stock returns for a broad (but groomed) sample of U.S. accelerated filers (roughly 1,500 stocks), and a comparable sample of European stocks, during 2007 through 2018 period, they find that:
- For the full U.S. accelerated filer sample, average quarterly (annual) reporting lag decreases from 36 (60) days in 2007 to 34 (54) days in 2018. About half of firms file reports within a few days of deadlines.
- Average monthly gross 1-factor (market), 3-factor (plus size and book-to-market) and 4-factor (plus momentum) alphas for U.S. accelerated filers are in the range 0.34%-0.36% for 10-K reports and 0.37%-0.40% for 10-Q reports. Findings are generally similar for:
- Holding intervals up to six months.
- Exclusion of firms that miss filing deadlines.
- Subsamples restricted to very large firms.
- Value weighting.
- European stocks.
- Long-only average monthly gross 1-factor, 3-factor and 4-factor alphas for the quintile of firms that report fastest are 0.14%-0.15%, 0.27% and 0.25%. Long-only findings are similarly robust.
- Shorter reporting lags further relate to more positive earnings surprises, higher firm efficiency, higher similarity between subsequent reports and more positive report sentiment compared to the prior report.
In summary, evidence indicates that individual stock investors may want to focus on firms that file quarterly and annual financial reports most promptly.
Cautions regarding findings include:
- Results are gross, not net. Accounting for monthly portfolio reformation and shorting costs would reduce returns, and shorting may not always be feasible as assumed. The study does not address portfolio turnover. Effect persistence and robustness among the largest firms mitigates this caution.
- Portfolio development and maintenance are beyond the reach of many investors, who would bear fees for delegating to a fund manager.
