Research project is (co)funded by the Slovenian Research Agency and by Ministry of Finance.
Project
Member of University of Ljubljana
School of Economics and Business
Code
J5-7387
Project
Influence of formal and informal corporate communications on capital markets
Period
1.3.2016 – 31.12.2018
Range on year
2,14 FTE
Head
Research activity
Social sciences/Economics
Research Organisation
Abstract
The goal of our research is to study the importance of informal communications and unregulated parts of annual reports for capital markets. The main goal of financial reporting in the financial system is to ensure high-quality, useful information about the financial position of firms, their performance and changes in their financial position is available (IASB Framework 2015) to a wide range of users, including existing and potential investors, financial institutions, employees, the government, etc. Formal reports contain both strictly regulated, financial sections, as well as unregulated, narrative parts. While formal communications are the subject of academic research, studies are relatively scarce. Our research starts from the hypothesis that informal communications are useful for capital markets, too, and that there is a relation between business performance and linguistic properties of unregulated parts of annual reports. However, formal communications with capital markets – be it in the form of regulated financial sections and unregulated parts of annual reports – do have weaknesses: direct and indirect costs, strict timelines (leading to a reporting delay between economic events and reporting dates), important information is omitted from these reports due to some properties of formal rules of financial reporting (even though they are priced by the market). We thus expand our research to include informal forms of communications such as posts on social networks and financial blogs. These focus on the short-term aspects of our study. On the long-(er)-term side, we will focus on the explanatory and predictive power of narratives in annual reports. We will use the methods of artificial intelligence - classification models, predictive machine learning. We will focus on transparent models that enable interpretation by domain experts. In data model construction the methods will use frequency based features and sentiment analysis (crucial for informal communication on social media), as well as more complex linguistic markers, such as referential vagueness (expressed by e.g. passive constructions and nominalisation), pronouns, adjective superlatives, specific collocations, etc. that are important especially in unregulated textual annual reports. Our research is innovative precisely because it relates linguistic properties and machine learning to capital markets and then relates these findings to the formal financial reporting system, to unregulated parts of formal reports and to other informal forms of communication. Despite the importance of this information to capital markets, there are relatively few academic studies in this area and several take very partial approaches. If this information is important for the capital markets (investors), they should be reflected in share prices, lower variability of share prices and thus lower risk, higher volume of trading, etc., which all leads to lower costs of capital, increases the amount of profitable investment opportunities for firms, ultimately leading to higher GDP growth. Our research has implications for a large part of the economic system. The size of EU capital markets is 52% of GDP and the size of debt-securities markets 79% of GDP (ECB 2015). Our research aims to overcome uncertainty in capital markets and increase the quality of information available to investors. The key outcome of this is lower cost of capital, which increases firms’ investment, and more investments leads to higher economic growth (gross domestic product).
Researchers
The phases of the project and their realization
- Collection and preparation of data (WP1)
- Informal communications modelling (WP2)
- Modeling unregulated parts of annual reports (WP3)
- Analysis and interpretation of results (WP4))
- Application and dissemination of results
