1. INTRODUCTION
1.1 RESEARCH PURPOSE AND MOTIVATION
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
1
1. INTRODUCTION
1.1 RESEARCH PURPOSE AND MOTIVATION
Managers and companies convey performance to recent and prospective investors by accounting numbers. It is the most important and convenient way for investors to understand a company in today’s world. By referring to standardized format of financial statements required by laws and exchanges, investors can utilize and implement useful firm-specific information to help them evaluate and make appropriate decisions in time. High quality financial reporting can not only reduce the information asymmetry because of principal–agent problem but also facilitate sound capital markets and security market efficiency.
Financial reports are sources of information companies must provide to the public quarterly and annually. Major content included in the financial reports are Statement of Financial Position, Statement of Comprehensive Income, Statement of Stockholders’
equity, Statement of Retained Earnings and footnotes to financial statements.
Differences between these four statements and footnotes to financial statements are the content of the data provided, the former mainly provide numerical information about the reporting period and the latter mostly provide explanatory and supplementary information to help financial report users better understand the calculation and explanation of an account or figure. With fundamentals and supplementary information required by laws and exchanges, one can acquire related company-specific information easily. By just referring to a company or exchange’s websites, when an investor is interested in a public company, he can find financial, operational and other readily available information easily accessible.
However, besides financial reports and other formal announcement issued by
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
2
managers and companies, other sources of information provide not only accounting figures but also information with different perspective to the public. For example, analysts’ research reports, government publications, periodicals and, most handy and even free of charge sources of instantaneous information, financial news articles.
Compared to periodic financial reporting, which normally has time lag before being available to the public, these alternatives can provide information on a more timely basis and help investors act instantly on receiving each pieces of information. It is said that because of the time lag when financial reports are announced, financial reports provide past performances of a company and therefore investors usually combine them with current information to help them predict the future outcome of a company.
Therefore, current and prospective investors may combine financial reports provided by companies with more current financial news articles together to perform better decision-making.
Ever since the invention of the World Wide Web (WWW), people are able to keep crucial and valuable information highly related to the financial markets at their fingertips. Various types of financial information are free of charge and they are just a click away. For example, Wall Street Journal (WSJ), Bloomberg, CNN, and UDNdata, a Taiwanese-based news database with searchable feature of full-text newspapers. All these make textual information attractive resources to discover. Hundreds of millions of news on the Internet are updated daily. Compared to TV news and newspapers, online news is the easiest way one can capture what is happening and what might happen in the future in no time. For example, financial news articles may discuss possible reasons to the current economic condition and make prediction to the coming months.
Efficient Markets Hypothesis (EMH) states that the market reacts instantaneously according to new incoming information (Fama 1965). News releases may influence
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
3
investor’s behavior and expectations and in turn affect stock market fluctuations. In the financial markets, changes in stock prices are the consequences of many unpredictable actions taken by investors and companies and even economic condition of a country.
The wording throughout the financial reports and financial news articles may signal or imply managers’ or market expectations about the future performance.
Managers’ earnings release language varies significantly across firms and ranges from straightforward to promotional (Mahoney et al. 2004). It is well established that presenting information in positive terms results in more favorable evaluations than does presenting information in negative terms (Levin et al. 1998). At the most basic level, positive and negative language has a substantial influence on how information is processed. Language also influences how information is both perceived and understood (Katz 2001; Morris et al. 2005). As the standardized financial reports are required for presentation, there is comparatively little room for companies and managers to express information in his favorable way.
Most of researches on data analytics during the past several decades aimed at mining information from numerical data. There are also advanced techniques developed to help analyze textual information. In recent years, many studies are focus on analyzing semi-structured and unstructured data, such as textual data. The major difficulty in analyzing textual data is that it has to be preprocessed first to make it possible for existing data-mining and related statistical software to analyze. Text analytics are processes by computer software, which automatically extract new and previously unclear information with mathematical and statistical methods. Steps in text analytics includes collecting textual data, processing the data into computer-readable data, organizing large amount of data into categorized data, and analyzing features. This study focuses on the sentiment and the information abundancy disclosed in financial
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
4
news articles and annual financial statements, especially footnotes to financial statements. That is, this study expects to observe market responses to words and information presented in both news articles and financial statements and further discusses the information content gap between financial news articles and footnotes to financial statements.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
5