Measuring Investment Opportunities Using Financial Statement Text

52 Pages Posted: 15 May 2019

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Xinjie Ma

Temple University - Department of Accounting

Hoa Tran

Ohio State University (OSU) - Department of Finance

Date Written: February 17, 2019

Abstract

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

Basu, Sudipta and Ma, Xinjie and Tran, Hoa Xuan, Measuring Investment Opportunities Using Financial Statement Text (February 17, 2019). Available at SSRN: https://ssrn.com/abstract=3372691 or http://dx.doi.org/10.2139/ssrn.3372691

Sudipta Basu (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Xinjie Ma

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Hoa Xuan Tran

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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