Text-Based Innovation Measure and Firm Performance

Abstract

In this study, we investigate whether firms’ content-rich textual filings can help us understand their level of intangible capital and innovation that is generally not recognized in financial statements. Using novel terms introduced in firms’ 10-K business descriptions, we develop a text-based innovation measure that is also applicable to firms in non-R&D industries. The measure captures not only product and service innovations but also innovations in business models or organizational methods, typically not captured by conventional innovation proxies. We find that these novelties help explain future sales growth, operating profitability, and capital market performance beyond accounting numbers. We show that our measure correlates with R&D investments and SGA expenses related to intangible capital. Our study extends the earlier work showing the usefulness of textual disclosures in terms of assessing a firm’s degree of innovation and contributes to the long-standing debate regarding the recognition of intangibles in financial statements.

Mustafa Ahçı

Assistant Professor of Accounting

My research interests include corporate disclosures, corporate innovation, capital markets.