Measuring Investment Opportunities Using Financial Statement Text

• In Event: Voluntary Disclosure - Textual Analysis

Abstract

We analyze 10-K texts from EDGAR during 1995-2010 to develop word lists that holistically describe firms’ investment opportunity sets. In cross-sectional data, we find that key words related to expansion, acquisition, debt financing, equity financing, unionization and distress are indicative of firms’ investment opportunities, in addition to industry-specific word lists. In time-series data, words related to new leases, by-laws changes, external financing, impairments, lawsuits, layoffs and changes in board of directors are associated with investment opportunities, in addition to large-scale shocks, such as the 2008 financial crisis, and regulatory changes, such as the 2002 Sarbanes-Oxley Act. These word lists allow us to construct multi-dimensional measures of firms’ investment opportunities. These measures outperform and have incremental information upon Tobin’s Q and/or industry fixed-effects in predicting firms’ future investments, financing decisions and payouts.

Authors

• Sudipta Basu, Temple University

• Hoa Xuan Tran, Temple University

• Xinjie Ma, Temple University