Companies that file their annual and quarterly reports faster, command a higher premium than slower-filing firms, research by Dutch asset manager NN Investment Partners has suggested.
It shows that by using natural language processing (NLP) as well as sentiment analysis, investors could better locate untapped potential for alpha generation.
In collaboration with Bas Peeters, visiting fellow at Amsterdam’s Free University (VU), NN IP’s European equity team used NLP techniques to calculate the tone of report text and the changes between sequential quarterly and annual reports from the same company.
They found that a slower filing time – typically just a few days – was linked to more negative phrasing throughout the report and less similarity to the previous one.
This in turn had predictive power for future stock returns, as slower-filing companies measurably underperformed faster-filing firms, according to NN IP.
As a potential cause for the connection, Karim Bannouh, senior portfolio manager in NN IP’s European equity team, cited the time it required to make changes to a report, “especially if a company is trying to manipulate how it is perceived, or wants to highlight certain elements”.
Another possible reason could be that faster-filing companies can process information more quickly and efficiently, which is positive for business operations, he said.
The research also shows the phenomenon is applied across different sectors and regions, making no difference whether companies were large-cap firms or small caps.
NN IP said its European equity team was already using the findings in its investment process.
The findings point to new possibilities for incorporating sentiment analysis and NLP into investment decisions.
The firm said NLP techniques were particularly valuable for investment considerations, such as ESG factors, “as these areas are more subjective and harder to quantify”.
NLP is a branch of articial intelligence that helps companies understand, interpret and manipulate human language.