Can the text features of regulatory inquiry letters predict companies’ financial restatements? Evidence from China

Abstract

Purpose

Since the implementation of the regulatory inquiry system, research on its impact on information disclosure in the capital market has been increasing. This article focuses on a specific area of study using Chinese annual report inquiry letters as the basis. From a text mining perspective, we explore whether the textual information contained in these inquiry letters can help predict financial restatement behavior of the inquired companies.

Design/methodology/approach

Python was used to process the data, nonparametric tests were conducted for hypothesis testing and indicator selection, and six machine learning models were employed to predict financial restatements.

Findings

Some text feature indicators in the models that exhibit significant differences are useful for predicting financial restatements, particularly the proportion of formal positive words and stopwords, readability, total word count and certain textual topics. Securities regulatory authorities are increasingly focusing on the accounting and financial aspects of companies' annual reports.

Research limitations/implications

This study explores the textual information in annual report inquiry letters, which can provide insights for other scholars into research methods and content. Besides, it can assist with decision making for participants in the capital market.

Originality/value

We use information technology to study the textual information in annual report inquiry letters and apply it to forecast financial restatements, which enriches the research in the field of regulatory inquiries.

Citation

Zhang, C., Cao, Z., Li, Z., Zhu, W. and Wu, Y. (2024), "Can the text features of regulatory inquiry letters predict companies’ financial restatements? Evidence from China", Kybernetes, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/K-12-2023-2605