Predicting Future Earnings Change Using Numeric and Textual Information in Financial Reports
The main propose of this study is to build a more powerful earning prediction model by incorporating risk information disclosed in the textual portion of financial reports. We adopt the single-index model developed by Weiss, Naik and Tsai as a foundation. However, other than the traditionally used numeric financial information, our model adds textual information about risk sentiment contained in financial reports. We believe such a model can reduce specification errors resulting from pre-assuming linear relationship, thus can predict future earnings more accurately. The empirical results show that the modified model does significantly improve the accuracy of earning prediction.
KeywordsSingle-index model earnings prediction risk sentiment textual information
Unable to display preview. Download preview PDF.
- 2.Ball, R., Watts, R.: Some Time Series Properties of Accounting Income. Journal of Finance, 663–682 (June 1972)Google Scholar
- 4.Beaver, W., Lambert, R.A., Ryan, S.G.: The Information Content of Security Prices: a Second Look. Journal of Accounting and Economics 9 (1987)Google Scholar
- 8.Fairfield, P.M., Sweeney, R.J., Yohn, T.L.: Accounting Classification and the Predictive Content of Earnings. The Accounting Review 71(3), 337–355 (1996)Google Scholar
- 12.Li, F.: Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports? Working paper (2006)Google Scholar
- 15.Wang, T.W., Rees, J.: Reading the Disclosures with New Eyes: Bridging the Gap between Information Security Disclosures and Incidents. Working paper (2007)Google Scholar