Does Stock Market Value Firms’ Soft Information?

The question of whether investors consider soft information to inform their decisions is an important one that has been raised by academics and professional/regulatory bodies over the last two decades, given the intensity of information overload in the era of big data.

The authors of this research have been investigating this question, from different angles, over the years. They relied on innovative techniques employing sentiment analysis and machine learning to quantify soft information. Below is a brief synopsis of the primary outcomes of this research.

In two published papers in 2021, Albert Acheampong (Ph.D. student at Bradford University School of Management, UK) and Dr. Tamer Elshandidy looked at how the European market reacts to soft information for a sample of European banks. The results suggested that soft information plays a vital role in explaining and predicting credit risk and changes in credit ratings. The evidence also shows that European banks provided meaningful information on their risk management that considerably reduces their cost of capital.

Examining the same question from a different perspective, Mohamed Elsayed (Ph.D. student at the School of Accounting and Finance at the University of Bristol, UK) and Dr. Tamer Elshandidy explored how soft information can predict corporate failure. They found convincing evidence that relevant soft information on corporate failure can predict firms' failure up to two years ahead of actual failure.

The findings suggest that corporate reporting information is helpful in explaining various firm underlying fundamentals, confirming the credibility of the narrative sections of corporate reports. These results have important practical implications for managers, regulators, and investors by contributing to the ongoing discussion on the value relevance of (soft) accounting information.

 

The outcomes of this research:

 

Acheampong, A, and Elshandidy, T. (2021). Does soft information determine credit risk? Text-based evidence from European banks. Journal of International Financial Markets, Institutions and Money, 75(6),101303. (A in ABDC, 3* in ABS, Q1 in Scopus).

 

Elshandidy, T., and Acheampong, A. (2021). Does hedge disclosure influence cost of capital for European banks? International Review of Financial Analysis, 78(6), 101942. (A in ABDC, 3* in ABS, Q1 in Scopus).

 

Elsayed, M., and Elshandidy, T. (2020). Do narrative-related disclosures predict corporate failure? Evidence from UK non-financial publicly quoted firms.International Review of Financial Analysis, 71(October), 101555. (A in ABDC, 3* in ABS, Q1 in Scopus).