Predicting industry sectors from financial statements: An illustration of machine learning in accounting research

Hans van der Heijden

The British Accounting Review, 2022, vol. 54, issue 5

Abstract: The main aim and contribution of this study is to outline and demonstrate the usefulness of a machine learning approach to address prediction-based research problems in accounting research, and to contrast this approach with a more conventional explanation-based approach familiar to most accounting scholars. To illustrate the approach, the study applies machine learning to predict a firm's industry sector using the firm's publicly available financial statement data. The results show that an algorithm can predict an industry sector with just this data to a high degree of accuracy, especially if a non-linear classifier is used instead of a linear classifier. Additionally, the algorithms were able to carry out an industry-firm pairing exercise taken from introductory accounting text books and MBA cases, with predicted answers showing a high degree of accuracy in carrying out this exercise. The study shows how machine learning approaches and algorithms can be valuable to a range of accounting domains where prediction rather than explanation of the dependent variable is the main area of concern.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:54:y:2022:i:5:s0890838922000257

DOI: 10.1016/j.bar.2022.101096

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