Predicting Corporate Policies Using Downside Risk: A Machine Learning Approach
65 Pages Posted: 15 Feb 2016 Last revised: 15 Jan 2021
Date Written: October 18, 2020
This paper develops a text-based downside risk measure using corporate annual reports and assesses its ability to forecast future corporate policies. The forward-looking measure dynamically captures adverse firm conditions evolving from economic fundamentals. When the measure is below its sample average, leverage, investment, R&D, employment, and dividends consistently fall. When the measure rises, firms increase cash holdings. The proposed measure also delivers robust and persistent forecasts based on in-sample and out-of-sample LASSO regressions.
Keywords: risk shock, corporate policies, texual analysis, LASSO
JEL Classification: G3
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