Darina SlatteryTKE’02 30 th August Automatic Analysis of Corporate Financial Disclosures Darina M. Slattery University of Limerick Ph.D. Postgraduate Student Richard F.E. Sutcliffe University of Limerick Eamonn J. Walsh University College Dublin

Darina SlatteryTKE’02 30 th August Research Objective To investigate the correlation between the release of disclosure information and share price resonses, and to develop a system that will analyse such disclosure information and predict the likely share price response accordingly

Darina SlatteryTKE’02 30 th August Principal Stages of Research Identify Interesting Content in Disclosures Use Classification Techniques to Predict the likely Share Price Response, based on Interesting Content identified

Darina SlatteryTKE’02 30 th August Definition of Financial Terms Corporate Financial Disclosures Securities & Exchange Commission (SEC) EDGAR

Darina SlatteryTKE’02 30 th August Definition of Financial Terms SIC Code CIK Code Ticker Symbol Registrant

Darina SlatteryTKE’02 30 th August Sources of Financial Information Disclosures Historical Share Price Data Press Releases Industry Trends Speculation

Darina SlatteryTKE’02 30 th August SEC & EDGAR: Background (1/2) The Securities Act of 1933 & the Securities Exchange Act of 1934: Require all Public Domestic Companies to disclose and file Specific Periodic & Annual Reports with the SEC As of May 1996, all SEC disclosures must be filed on EDGAR and thus made available online at

Darina SlatteryTKE’02 30 th August SEC & EDGAR: Background (2/2) EDGAR can be accessed by: Web Browser Anonymous File Transfer Protocol (FTP) EDGAR Search Facilities: General-Purpose Searches Special-Purpose Searches

Darina SlatteryTKE’02 30 th August EDGAR Disclosures Format Dictated by Law Plain Text or HTML only Certain Limitations on HTML Tags For Consistency

Darina SlatteryTKE’02 30 th August EDGAR Form Types (1/2) Form 10-Q Quarterly Report Continuing View of the Company Due within 45 Days after Quarter Close Form 10-K Annual Report Comprehensive Overview of the Company Due within 90 Days after End of Fiscal Year

Darina SlatteryTKE’02 30 th August EDGAR Form Types (2/2) Form 8-K Current Report Reports the Occurrence of any Material Events and Corporate Changes Of interest to Shareholders & Potential Investors Due within 5 or 15 Days after the Event Occurrence, depending on Event

Darina SlatteryTKE’02 30 th August Stages Undertaken To-Date Obtained Suitable Data Set Analysed Structure of Form 8-K’s Prepared Content for Classification Attempted to Classify Documents by Likely Share Price Response

Darina SlatteryTKE’02 30 th August Data Set Obtained 567 Form 8-K disclosures in SIC 7372 Filing Date URL Share Price Response around Filing Date UpDownNochange 219/ 567 Disclosures Chosen for Experiments Categorised by Share Price Response 80% of each Category used as Training Data 20% of each Category used as Test Data

Darina SlatteryTKE’02 30 th August Structural Analysis Header Items 1-9 Item 1: Changes in Control of Registrant Item 2: Acquisition or Disposition of Assets Item 3: Bankruptcy or Receivership Item 4: Changes in Registrant’s Certifying Accountant Item 5: Other Materially Important Events Item 6: Resignations of Registrant’s Directors Item 7: Financial Statements and Exhibits Item 8: Change in Fiscal Year Item 9: Regulation FD Disclosure Appendices

Darina SlatteryTKE’02 30 th August Content Preparation: Wordsmith On June 2, 1998, XXX Corporation announced in a press release the signing of an Acquisition Agreement and Plan of Merger … On May 2, 2000, XXX Corporation announced in a press release the sale of the outstanding capital stock of … On April 17, 1997, XXX Corporation signed an Agreement and Plan of Merger … agreement and plan of merger announced in a press release the outstanding capital stock of … Note: Sorted by frequency in descending order 219 Disclosures … Large Phrase List WORDSMITHWORDSMITH

Darina SlatteryTKE’02 30 th August Content Preparation: Tokenisation ‘agreement’,’and’,’plan’,’of’,’merger’ ‘announced’,’in’,’a’,’press’,’release’ ‘the’,’outstanding’,’capital’,’stock’,’of’ … agreement and plan of merger announced in a press release the outstanding capital stock of … Note: Sorted by frequency in descending order Large Phrase List Tokenised Phrase List Note: 219 Disclosures are also Tokenised

Darina SlatteryTKE’02 30 th August Content Preparation: Compound Search Trees ‘agreement’,’and’,’plan’,’of’,’merger’ ‘announced’,’in’,’a’,’press’,’release’ ‘the’,’outstanding’,’capital’,’stock’,’of’ … COMPOUND SEARCH TREE GENERATOR [agreement, [and, [plan, [of, [merger, []]]]]] [announced, [in, [a, [press, [release, []]]]]] [the, [outstanding, [capital, [stock, [of, []]]]]] … Note: At this stage, the phrase list is cut off at 100, 1000 & phrases for the three experiments Tokenised Phrase List Search Tree

Darina SlatteryTKE’02 30 th August Content Preparation: Compound Noun Matching (1/2) ‘on’,’june’,’2’,’1998’,’xxx’,’corporation’,’announ ced’,’in’,’a’,’press’,’release’,… ‘on’,’may’,’2’,’2000’,’xxx’,’corporation’,’announ ced’,’in’,’a’,’press’,’release’,… ‘on’,’april’,’17’,’1997’,’xxx’,’corporation’,’signed ’,’an’,’agreement’,’and’,’plan’… … Search Tree COMPOUND NOUN MATCHING 219 Disclosures [agreement, [and, [plan, [of, [merger, []]]]]] [announced, [in, [a, [press, [release, []]]]]] [the, [outstanding, [capital, [stock, [of, []]]]]] …

Darina SlatteryTKE’02 30 th August Content Preparation: Compound Noun Matching (2/2) announced_in_a_press_release agreement_and_plan_of_merger … announced_in_a_press_release the_outstanding_capital_stock_of … agreement_and_plan_of_merger … COMPOUND NOUN MATCHING 219 Disclosures With Single Token Phrases … The Number of Single Token Phrases is Determined by the Length of Phrase List Used (100, 1000 or Phrases)

Darina SlatteryTKE’02 30 th August Content Preparation: Overview On June 2, 1998, XXX Corporation announced in a press release the signing of an Acquisition Agreement and Plan of Merger … On May 2, 2000, XXX Corporation announced in a press release the sale of the outstanding capital stock of … On April 17, 1997, XXX Corporation signed an Agreement and Plan of Merger … 219 Disclosures … announced_in_a_press_release agreement_and_plan_of_merger … announced_in_a_press_release the_outstanding_capital_stock_of … agreement_and_plan_of_merger … … 219 Disclosures With Single Token Phrases

Darina SlatteryTKE’02 30 th August Classification: DTS System (1/2) The C4.5 Decision Tree System (DTS) A Machine Learning Algorithm Derives Decision Trees Set of Records (i.e. Set of Disclosures) Non-Categorial Attributes Categorial Attribute Files Required File.namesFile.dataFile.test

Darina SlatteryTKE’02 30 th August Classification: DTS System (2/2) File.names Defines Non-Categorial & Categorial Attributes File.data & File.test Training & Test Files Take Same Format TRUE,FALSE,FALSE,…,UP FALSE,TRUE,TRUE,…,DOWN FALSE,FALSE,TRUE,…,NOCHANGE …

Darina SlatteryTKE’02 30 th August Classification: IIS System The Inverted Index System (IIS) A Conventional Information Retrieval (IR) System But used as a Classification System Here Query = Disclosure Only 3 Documents in Document Collection Ups Downs Nochanges

Darina SlatteryTKE’02 30 th August Classification Experiments Conducted Three Experiments DTS & IIS used in each experiment First Experiment 100 Most Frequently Occurring Phrases Second Experiment 1,000 Most Frequently Occurring Phrases Third Experiment 10,000 Most Frequently Occurring Phrases

Darina SlatteryTKE’02 30 th August Classification Results N-Most Frequent Phrases DTSIIS (Default up) IIS (Default down) IIS (Ignore default) 10038%36%38%45% 1,00044%31%38%34% 10,00042%40%42%

Darina SlatteryTKE’02 30 th August Conclusions & Next Steps How can we Improve the Classification Results? Identify Significant Disclosures Identify Significant Content Increase Data Set Two-Way Classification? Automate Partitioning of Relevant Disclosures Automate Scanning for Significant Content

Darina SlatteryTKE’02 30 th August Contact Details Ms. Darina Slattery, B.B.S. M.Sc. Dept. of Computer Science & Information Systems, University of Limerick, Limerick, Ireland Tel: