What Can Analysts Learn from Artificial Intelligence about Fundamental Analysis?

71 Pages Posted: 8 Jan 2021 Last revised: 7 Apr 2021

See all articles by Oliver Binz

Oliver Binz

INSEAD

Katherine Schipper

Duke University - Fuqua School of Business

Kevin Standridge

Duke University, Fuqua School of Business, Students

Date Written: November 1, 2020

Abstract

We apply a machine learning algorithm to estimate Nissim and Penman’s (2001) structural framework that decomposes profitability into increasingly disaggregated profitability drivers. Our approach explicitly accommodates the non-linearities that precluded Nissim and Penman from estimating their framework. We find that out-of-sample profitability forecasts from our approach are generally more accurate than those of benchmark models. We use the profitability forecasts to estimate intrinsic values using the financial statement analysis design choices in Nissim and Penman’s framework and find that hypothetical investing strategies based on these value estimates generate risk-adjusted returns. Design choices that improve performance include increasingly granular disaggregation, a focus on core items, and long-horizon forecasts of operating performance. Perhaps surprisingly, we find only mixed evidence of benefits from incorporating historical financial statement information from beyond the current period.

Keywords: Financial Statement Analysis, Machine Learning, Earnings Forecasting

JEL Classification: C53, G10, M41

Suggested Citation

Binz, Oliver and Schipper, Katherine and Standridge, Kevin, What Can Analysts Learn from Artificial Intelligence about Fundamental Analysis? (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3745078 or http://dx.doi.org/10.2139/ssrn.3745078

Oliver Binz (Contact Author)

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

Katherine Schipper

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Kevin Standridge

Duke University, Fuqua School of Business, Students ( email )

Durham, NC
United States

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