Fundamental Analysis of Detailed Financial Data: A Machine Learning Approach

77 Pages Posted: 3 Feb 2021 Last revised: 2 Apr 2021

See all articles by Xi Chen

Xi Chen

New York University (NYU) - Leonard N. Stern School of Business

Yang Ha Cho

New York University (NYU) - Department of Accounting

Yiwei Dou

New York University (NYU) - Department of Accounting

Baruch Lev

New York University - Stern School of Business

Date Written: April 1, 2021

Abstract

We conduct a fundamental analysis of detailed financial information to predict earnings. Since 2012, all U.S. public companies must tag quantitative amounts in financial statements and footnotes of their 10-K reports using the eXtensible Business Reporting Language (XBRL). Leveraging machine learning methods, we combine the high-dimensional XBRL-tagged financial data into a summary measure for the direction of one-year-ahead earnings changes. The measure shows significant out-of-sample predictive power concerning the direction of earnings changes. Hedge portfolios are formed based on this measure during 2015-2018. The annual size-adjusted returns to the hedge portfolios range from 5.02 to 9.7 percent. Our measure and strategies outperform those of Ou and Penman (1989), who extract the summary measure from 65 accounting variables using logistic regressions. Additional analyses suggest that the outperformance stems from both nonlinear predictor interactions missed by regressions and the use of more detailed financial data.

Keywords: Fundamental Analysis, Detailed Financial Data, XBRL, Machine Learning

JEL Classification: M41, G12

Suggested Citation

Chen, Xi and Cho, Yang Ha and Dou, Yiwei and Lev, Baruch Itamar, Fundamental Analysis of Detailed Financial Data: A Machine Learning Approach (April 1, 2021). Available at SSRN: https://ssrn.com/abstract=3741015 or http://dx.doi.org/10.2139/ssrn.3741015

Xi Chen

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Yang Ha Cho

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Yiwei Dou (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Baruch Itamar Lev

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

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