1. Darina SlatteryTKE’02 30 th August 2002 1 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

2. Darina SlatteryTKE’02 30 th August 2002 2 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

3. Darina SlatteryTKE’02 30 th August 2002 3 Principal Stages of Research Identify Interesting Content in Disclosures Use Classification Techniques to Predict the likely Share Price Response, based on Interesting Content identified

4. Darina SlatteryTKE’02 30 th August 2002 4 Definition of Financial Terms Corporate Financial Disclosures Securities & Exchange Commission (SEC) EDGAR

5. Darina SlatteryTKE’02 30 th August 2002 5 Definition of Financial Terms SIC Code CIK Code Ticker Symbol Registrant

6. Darina SlatteryTKE’02 30 th August 2002 6 Sources of Financial Information Disclosures Historical Share Price Data Press Releases Industry Trends Speculation

7. Darina SlatteryTKE’02 30 th August 2002 7 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 http://www.sec.gov/edgarhp.htm

8. Darina SlatteryTKE’02 30 th August 2002 8 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

9. Darina SlatteryTKE’02 30 th August 2002 9 EDGAR Disclosures Format Dictated by Law Plain Text or HTML only Certain Limitations on HTML Tags For Consistency

10. Darina SlatteryTKE’02 30 th August 2002 10 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

11. Darina SlatteryTKE’02 30 th August 2002 11 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

12. Darina SlatteryTKE’02 30 th August 2002 12 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

13. Darina SlatteryTKE’02 30 th August 2002 13 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

14. Darina SlatteryTKE’02 30 th August 2002 14 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

15. Darina SlatteryTKE’02 30 th August 2002 15 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

16. Darina SlatteryTKE’02 30 th August 2002 16 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

17. Darina SlatteryTKE’02 30 th August 2002 17 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 & 10000 phrases for the three experiments Tokenised Phrase List Search Tree

18. Darina SlatteryTKE’02 30 th August 2002 18 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, []]]]]] …

19. Darina SlatteryTKE’02 30 th August 2002 19 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 10000 Phrases)

20. Darina SlatteryTKE’02 30 th August 2002 20 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

21. Darina SlatteryTKE’02 30 th August 2002 21 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

22. Darina SlatteryTKE’02 30 th August 2002 22 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 …

23. Darina SlatteryTKE’02 30 th August 2002 23 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

24. Darina SlatteryTKE’02 30 th August 2002 24 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

25. Darina SlatteryTKE’02 30 th August 2002 25 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%

26. Darina SlatteryTKE’02 30 th August 2002 26 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

27. Darina SlatteryTKE’02 30 th August 2002 27 Contact Details Ms. Darina Slattery, B.B.S. M.Sc. Dept. of Computer Science & Information Systems, University of Limerick, Limerick, Ireland Tel: +353-61-213551 Email: darina.slattery@ul.ie