Predicting financial distress of Chinese listed companies using machine learning: To what extent does textual disclosure matter?

Abstract

Using machine learning to predict the financial distress of Chinese listed companies, this study shows that the incremental value of textual disclosure in financial distress prediction diminishes in the presence of detailed financial data. Detailed financial data itself has the capacity to accurately predict financial distress, and its prediction performance is not improved when combined with predictors extracted from textual disclosure. The model using combined predictors attaches more importance to financial-data-based predictors than textual-data-based ones. Our results provide evidence about the overstated value of textual disclosure and the understated information value of detailed financial data in financial distress prediction.