50 Words You Don’t Want to See In a 10-K SEC Filing

Posted on December 18, 2014 by

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A research project just completed by Georgia Tech MSCS student Junwei Li looks at the impact words have on stock prices.

keywords: SEC Filing, stock price change

Quarterly reports affect stock prices

US federal securities laws require publicly traded companies to disclose information on an ongoing basis. US companies must submit annual reports on Form 10-K, and quarterly reports on form 10-Q.

These reports include earnings numbers and also the company’s own assessment of its performance. Investors and analysts watch for the release of these data, and review them carefully.  It is common to see a significant move in the price of a stock the day after a 10-K or 10-Q is released.

Of the information in a 10-Q/K, the earnings numbers reported are probably the most impactful, but the commentary is important as well.

Learn more about these filings at investopedia.

How to quantify the impact of words

To investigate how words in a 10-K or 10-Q impact company stock prices we borrowed some well-used techniques from the Natural Language Processing literature.

We looked at the filings of 56 technology stocks from 2000 to 2013, for a total of 3126 filings. Reports were classified as “negative” or “positive” according to whether, afterwards, the stock price went up or down relative to the market the next day.

We scored each word using the following criteria:

  • The number of times it appeared in negative reports.
  • The number of times it appeared in positive reports.
  • The magnitude of price movement after each report.

Without going into the math too much, we devised a ranking scheme that provides a high score, near 1.0, for words that frequently appear in positive reports and less frequently in negative reports. Similarly words that appear often in negative reports get a negative score near -1.0. Words that don’t seem to have much affect either way end up with scores near 0.0.

The list is below, but first…

The best and the worst words are listed below.  You can jump down to see them if you like. Come back here when you’re done.

For the most part the “bad” words associated with price drops are the kinds of things you’d expect: Words like “questionable,” “disturbing,” and “slander.” And similarly on the “good” side we find words like “outperform” and “confident.” It is especially nice to see “outperform” on the good side and “underperform” on the bad side.

On the other hand there are a few in there that I wouldn’t have expected, such as “unsafe” on the good list.  Clearly a topic worthy of further study.

And now…

And here they are: The 50 worst words

The words listed below occur frequently in “negative” 10-K or 10-Q filings associated with stock price drops:

JEOPARDIZED, RECALCULATE, TESTIFY, QUESTIONABLE,

IMPEDED, EXACERBATE, OVERSTATEMENT, SLANDER,

NONPERFORMING, UNFOUNDED, WORST, ILLICIT,

RENEGOTIATE, MANIPULATE, DISTURBING, CIRCUMVENT,

PREJUDICED, APPARENTLY, FRIVOLOUS, REJECT, PROTESTED,

REJECTS, DOWNSIZED, GRIEVANCE, REFILE, DISSENTING,

FORECLOSED, GRATUITOUS,  UNPREDICTED, MISAPPLICATION,

CLOSEOUT, COLLABORATES, OBLIGEE, DISSENTERS, FOREGO,

WRITS, PLEDGORS, PRECIPITATED, IDLED, SUGGESTS, BAILEE,

FRIENDLY, ARBITRAL, BREAKTHROUGHS, FAVORING,

CERTIORARI, PERSISTS, ADJOURNMENTS, IGNORING,

RECALCULATE

The 50 “best” words

The words listed below occur frequently in “positive” 10-K or 10-Q filings associated with stock price increases:

UNMATCHED, OUTPERFORM, VOIDED, CONFIDENT, REWARDED,

PROSPERITY, DISCREPANCY, RECTIFICATION, CRITICALLY,

FORFEITABLE, ARBITRARY, TURMOIL, IMBALANCE,

PROGRESSES, ANTECEDENT, OVERCHARGED, DURESS,

MANIPULATION, DISTRESSED, DISSOLUTIONS, HAZARD,

EXPROPRIATION, UNDERSTATE, UNFIT, PLEADINGS,

INVESTIGATED, SOMETIME, ENCROACHMENT, MISSTATE,

MUTANDIS, DEFRAUD, UNDEFINED, DELISTING, FORFEITS,

UNCOVERS, MALPRACTICE, PRESUMES, GRANTORS,

COLLAPSING, FALSELY, UNSOUND, REJECTIONS,

WHEREABOUTS, DAMAGING, REASSIGNMENT, DISTRACTING,

DISAPPROVED, STAGNANT, PREDECEASES, UNSAFE

For completeness: 50 “blah” words

The words listed below occur frequently in both “positive” and “negative” 10-K or 10-Q filings but don’t seem to be predictive of price changes:

IMPROVES, GAIN, FLUCTUATION, DISCONTINUE, STATUTES,

THEREUNTO, RISKY, RISKY, FLUCTUATES, SUBROGATION,

NEGATIVELY, LOSE, ATTORNEY, REVISED, COULD, EXPOSURE,

DEPENDENT, WILL, CONTRACTS, FAILURE, RISK, EASILY,

PROFICIENCY, SUPERSEDES, ACCESSION, DULY, MAY,

REMEDIED, VARIABLE, UNENFORCEABLE, RISKS, UNRESOLVED,

VARIATIONS, COURTS, PROBLEM, VARIED, HEREBY, PREDICT,

FAVORABLE, VULNERABILITY, CLAIMS, ALTERATION,

DISCONTINUING, BANKRUPTCY, DEPENDING, DEPENDING,

ATTAINING, OMISSIONS, CORRECTING

 

Acknowledgement

This post is based research conducted by Junwei Li as part of his coursework to complete an MSCS at Georgia Tech.

 

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