Unearthing Alpha in Financial Annual Reports

Abstract

Annual Reports are the management’s way of communicating with the stakeholders of a company. It contains a plethora of information concerning the company’s historical performance for a definite period and the management’s expectations about the company’s missions, goals and future. The paper highlights that a systematic textual analysis of the annual reports to derive a sentiment coefficient can help to create an alpha-factor and make sustainable returns that are orthogonal to the market returns, A strategy of long-short equity portfolio has been advocated wherein the selection criteria is based upon the ranking of sentiment coefficient so derived from the annual reports. The results document sound evidence of an established link between the stock returns and sentiment derived from the textual analysis of such reports.

Keywords: Textual Analysis, Sentiment Analysis, Alpha Factor, Factor Investment

JEL Classification: C58, G11