Predicting Earnings Directional Movement Utilizing Recurrent Neural Networks (RNN)

Abstract

The study has two objectives. The first, to develop an earnings movement prediction model to help investors in their decision process, the second, to explore the potential of Recurrent Neural Networks (RNN) in financial statement analysis and present a detailed model for its application. RNNs' two major advantages are: they do not make assumptions regarding the data and allow users to search whatever functional form best describes the underlying relationship between financial data and changes in earnings; they dynamically account for time – series behavior, earnings of a certain time period are not independent of earnings in previous time period s. The paper utilizes the newly mandated XBRL data, whose benefits are that it is freely available, easily accessible and is more timely than traditional data bases. The results of the study validate the use of RNNs by providing a higher accuracy prediction than neural networks and logistic regression.