Textual Similarity of Firm Accounting Policy Disclosures Reginald - - PowerPoint PPT Presentation

Textual Similarity of Firm Accounting Policy Disclosures

Reginald Edwards, PhD

April 2018

Sources of Accounting Information

• Quarterly Financial Reports (10-Q’s)
• Ad-hoc disclosures (e.g. 8-K’s)
• Annual Reports (10-K’s)

– MD&A – Footnotes to the Financial Statements

• “Summary of Significant Accounting Policies”

TD Ameritrade (NASDQ: amtd) 2017 Annual Report Footnotes

TD Ameritrade (NASDQ: amtd) 2017 Annual Report Footnotes

The Textual Similarity of Accounting Policy Disclosures

• For each firm-year, I extract the “Summary of Significant

Accounting Policies” section from annual report

• Compare text of industry peers using cosine similarity measure
• More similar text yields higher textual similarity score, SIM
• Compute SIM by comparing text of same firm in adjacent years for

context

Measuring Textual Similarity of Accounting Policy Disclosures

Cosine similarity

• Documents as vectors of word counts
• Text reuse/plagiarism detection
• Document clustering
• See Hoberg, Phillips, and Prabhala

(2012) for a finance application

Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) design, manufacture, and market personal computers, mobile communication devices, and portable digital music and video players and sell a variety of related software, third-party digital content and applications, services, peripherals, and networking

• solutions. (Apple 10-K, 2009)

Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and

• applications. (Apple 10-K, 2011)

Measuring Textual Similarity of Accounting Policy Disclosures

2009 and 2011 words

[apple, applications, collectively, communication, computers, content, design, devices, digital, manufacture, market, media, …]

2009 word vector: (2, 1, 1, 1, 1, 1, 1, 1, 2, 1, 1, 0, …) 2011 word vector: (2, 1, 1, 1, 1, 1, 1, 1, 2, 1, 1, 1, …)

Measuring Textual Similarity of Accounting Policy Disclosures

• 2009 = (2, 1, 1, 1, 1, 1, 1, 1, 2, 1, 1, 0, …)

2011 = (2, 1, 1, 1, 1, 1, 1, 1, 2, 1, 1, 1, …)

Measuring Textual Similarity

SIMAMTD = 0.9 SIMSCHW = 0.5 SIMETFC = 0.6

SCHW ETFC AMTD .10 0.8 0.2

Properties of Textual Similarity of Accounting Policy Disclosures

Percentile Mean Std Dev 1st 5th 25th 50th 75th 95th 99th Peer firm similarity 0.74 0.07 0.48 0.62 0.71 0.72 0.79 0.82 0.83 Own-firm similarity 0.80 0.09 0.47 0.65 0.76 0.80 0.86 0.94 0.95

WHAT IS THE INFORMATION CONTENT OF SIM?

Validation

Textual Similarity of Accounting Policy Disclosures: Covariates

Textual Similarity of Accounting Policy Disclosures and Earnings

• What is the predictive power of SIM for earnings measures?
• ROA (contemporaneous net income scaled by assets)
• Future ROA
• Future negative earnings indicator
• Future earnings decline indicator

Textual Similarity of Accounting Policy Disclosures and Earnings

• What is the predictive power of SIM for earnings measures?
• ROA (contemporaneous net income scaled by assets) ➔ YES (pos.)
• Future ROA ➔ NOT REALLY
• Future negative earnings indicator ➔ YES (neg.)
• Future earnings decline indicator ➔ YES (neg.)

Textual Similarity of Accounting Policy Disclosures and Earnings

• What is the predictive power of SIM for earnings measures?
• ROA (contemporaneous net income scaled by assets) ➔ YES (pos.)
• Future ROA ➔ NOT REALLY
• Future negative earnings indicator ➔ YES (neg.)
• Future earnings decline indicator ➔ YES (neg.)

ROAt ROAt+1 NEARN DEARN SIM 0.0047

• 0.0218
• 0.0400
• 0.0930

(0.0024) (0.0146) (0.0066) (0.0076)