Measuring Investment Opportunities Using Financial Statement Text

• In Event: Financial Reporting--Disclosure

Abstract

We analyze 10-K texts from EDGAR during 1995-2009 to score firms’ investment opportunity sets on multiple dimensions. We identify 645 unique key words that predict future investments and group them into 62 factors. Industry-specific factors include Bio-Pharmaceutical, Banking, Information Technology, Oil & Gas and Semi-conductor, while more general factors include Impairment, Debt Intensity, Executive Employment, Preferred Stock Buyback and Capital Seeking. Our multi-dimensional measures of firms’ investment opportunities outperform Tobin’s Q and/or industry fixed effects, in predicting out-of-sample future investments and related corporate policies, and even inform incrementally over lagged dependent variables.

Authors

• Hoa Tran, Temple University

• Sudipta Basu, Temple University

• Xinjie Ma, Temple University