Measuring Investment Opportunities Using Financial Statement Text
52 Pages Posted: 15 May 2019
Date Written: February 17, 2019
We textually analyze 10-K texts from EDGAR during 1995-2009 to score firms’ investment opportunity sets on multiple dimensions. We identify 646 unique key words that predict future investments and group them into 62 factors. Industry-specific factors include Bio-Pharmaceutical, Banking, Information Technology, Oil & Gas and Semi-conductor, while more general factors include Impairment, Debt Intensity, Executive Changes, Preferred Stock Buyback and Capital Seeking. Our multi-dimensional measures of firms’ investment opportunities outperform Tobin’s Q and/or industry-fixed effects, in predicting out-of-sample future (2010-15) investments and related corporate policies, and even inform incrementally over lagged dependent variables. Our IOS factors outperform Tobin’s Q more in subsamples with less efficient market prices, i.e., when Tobin’s Q is a noisier signal of investment opportunities.
Keywords: Investment Opportunities, IOS, Textual Analysis, Tobin’s Q, Corporate Policies, Lasso
JEL Classification: G31, G32, G35, M41, M21
Suggested Citation: Suggested Citation