Disclosure and Firm Separation: A Text-Based Examination

May 30, 2013 Leave a comment

Disclosure and Firm Separation: A Text-Based Examination

Christopher Ball Meta Heuristica, LLC

Gerard Hoberg University of Maryland – Department of Finance

Vojislav Maksimovic University of Maryland – Robert H. Smith School of Business

May 1, 2013

Abstract: 
We examine the hypothesis that high value firms use the Management’s Discussion and Analysis in the 10-K to separate from low value firms. We further hypothesize that high quality firms disclose a highly granular set of managerial policies that low quality firms cannot emulate due to high emulation, reputational and punishment costs in a regulated environment. We implement a standard computational linguistics approach to score MD&A disclosures in a high dimensional space, and find strong support for these central separation and granularity hypotheses. We also find that verbal content is most informative about more distant future outcomes, separation is stronger within industry groups, and content relating to high-growth entrepreneurial policies is especially relevant to separate firms. The value relevance of MD&A also increased following a 2003 SEC guidance release which likely increased the emulation costs faced by low value firms.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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