From Transcripts to Insights: Uncovering Corporate Risks Using Generative AI

53 Pages Posted: 7 Oct 2023

See all articles by Alex Kim

Alex Kim

University of Chicago Booth School of Business

Maximilian Muhn

University of Chicago - Booth School of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: October 5, 2023

Abstract

We explore the value of generative AI tools, such as ChatGPT, in helping investors uncover dimensions of corporate risk. We develop and validate firm-level measures of risk exposure to political, climate, and AI-related risks. Using the GPT 3.5 model to generate risk summaries and assessments from the context provided by earnings call transcripts, we show that GPT-based measures possess significant information content and outperform the existing risk measures in predicting (abnormal) firm-level volatility and firms’ choices such as investment and innovation. Importantly, information in risk assessments dominates that in risk summaries, establishing the value of general AI knowledge. We also find that generative AI is effective at detecting emerging risks, such as AI risk, which has soared in recent quarters. Our measures perform well both within and outside the GPT’s training window and are priced in equity markets. Taken together, an AI-based approach to risk measurement provides useful insights to users of corporate disclosures at a low cost.

Keywords: GPT, ChatGPT, large language models, generative AI, risk information, firm-level risk exposure, conference call, political risk, AI risk, climate change risk

JEL Classification: C45, D81, G12, G30, G32, M41

Suggested Citation

Kim, Alex G. and Muhn, Maximilian and Nikolaev, Valeri V., From Transcripts to Insights: Uncovering Corporate Risks Using Generative AI (October 5, 2023). Chicago Booth Research Paper No. 23-19, Fama-Miller Working Paper, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2023-132, Available at SSRN: https://ssrn.com/abstract=4593660 or http://dx.doi.org/10.2139/ssrn.4593660

Alex G. Kim (Contact Author)

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Maximilian Muhn

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Valeri V. Nikolaev

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

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