News Sentiment in Bankruptcy Prediction Models: Evidence from Russian Retail Companies

Аннотация

This study is aimed at investigating the application of news sentiment analysis to bankruptcy prediction models in the context of the Russian retail sector.

We analyse 190 companies: 95 Russian retail companies that went bankrupt in 2015-2019, and 95 non-defaulting analogue companies. This figure was attained from a larger pool of 312 companies retrieved from the Spark database on the basis of analysis of relevant financial data and further validated by the presence of pertinent news media coverage within 3 years of default date. The methodological base of this analysis is the logistic regression approach, used as a benchmark model, and several machine learning models: random forest, support vector machine, and multilayer perceptron.

The predictor set applied consists of 34 financial variables and sentiment variables, aggregated using the ‘bag-of-words’ from a total sample of 4877 news articles, from more than 800 distinct online resource locations. We establish a set of hypotheses based on a review of existing literature in the area, and evaluate their accuracy on the basis of our technical analysis.

Our results show that sentiment variables are statistically significant, and that adding sentiment variables improves the performance of bankruptcy prediction models. Also, the results indicate some reference characteristics of companies in terms of word-choice and descriptions in the news, indicating word choices correlated with financially stability and those correlated with financially instability.