Measuring Multidimensional Investment Opportunity Sets with 10-K Text

71 Pages Posted: 15 May 2019 Last revised: 8 Dec 2022

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Xinjie Ma

Business School, National University of Singapore

Hoa Briscoe-Tran

University of Alberta - School of Business

Date Written: January 8, 2021

Abstract

We show that firms’ investment opportunity sets (IOS) are multidimensional. Analyzing Form 10-K texts, we identify 445 unique keywords that predict firms’ future investments during 1995-2009 and combine them into 43 underlying factors. Industry-specific factors include Bio-Pharma, Banking, Information Technology, Oil & Gas and Retail Stores, while more general factors include Equity Intensity, Debt Intensity, Lease, Going Concern and Acquisition. These factors form our multidimensional measures of IOS. They outperform Tobin’s Q and/or industry fixed effects, in predicting out-of-sample (2010-15) investments and related corporate policies, and even inform incrementally over lagged dependent variables. We trace the factors’ improved predictive power to their multidimensional nature, which captures IOS-related variation within and between industries, and stability in IOS that allows 10-K texts to be more informative.

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 Briscoe-Tran, Hoa, Measuring Multidimensional Investment Opportunity Sets with 10-K Text (January 8, 2021). 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

Business School, National University of Singapore ( email )

Hoa Briscoe-Tran

University of Alberta - School of Business ( email )

2-43 Business Building
Edmonton, Alberta T6G 2C7
Canada

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