Introduction
Origin
- Lauren Cohen, professor at HBS, noticed a strange disclosure in 10k’s
- Suppliers are required to disclose customers that make up over 10% of their sales; however, in the following year’s 10k, the same customers that were now less than 10% of sales were still being reported
- Companies are lazy to change the 10k’s and instead, they decide to use exact templates from previous year
Inspiration
- When professional investors see significant changes in filings year-over-year, in most cases they find that companies are adding negative statements or additional risks
- Corporate lawyers usually craft the changes in a way that is less likely to be noticed by investors
- Changes in price are typically observed after a public press release, not after analyzing the language of 10k’s year-over-year
Application
- Investors usually don’t read the risks factors section
- Language processing tools can be helpful to compare the changes and decide which companies to short and which ones to buy
- Short: “changers”
- Buy: “non-changers”