ChatGPT Could Help Investors Make More Informed Decisions

The summarized MD&As and conference-call transcripts were, on average, substantially shorter than the original documents—less than half the size. Cutting out cautious language and generic statements contained in many of the longer reports provided more accurate assessment of the genuine sentiment—whether positive or negative—expressed in corporate disclosures, the research finds.

Kim, Muhn, and Nikolaev then studied the companies’ individual stock activity over a two-day window following their disclosures. They find that the clearer sentiment of the summarized reports better explained the price movements that followed disclosures. Additionally, when a company reported losses and displayed negative sentiment in its original report, the amount of bloat (that is, the redundant, irrelevant language not included in the summaries) was generally higher—consistent with the idea that companies seek to obscure downbeat news.

More bloated reports were also associated with a drop in overall price efficiency for a company’s stock. Prices are most efficient when both parties in a stock trade have equal information—and less efficient when one party is more informed than the other. A professional manager might use tools to analyze long reports, but a typical retail investor doesn’t have access to those. Through an estimate based on the statistical model, the researchers find that a 1 standard deviation increase in bloat for MD&As led to a 1.6 percent increase in the probability of “informed trading” (one party being more informed that the other), and thus less-efficient trading.

They also find the added bloat led to a 9 percentage point decrease in the speed of price discovery for a company’s stock, and an 18 percentage point increase in the bid-ask spread (the difference between the maximum price buyers are willing to pay and the minimum price sellers are willing to accept). The higher the bid-ask spread, the more expensive it is to trade.

For conference calls, the analysis indicates that a 1 standard deviation increase in bloat led to a 1.7 percent increase in the probability of informed trading, a 5 percentage point decrease in the speed of price discovery, and a 45 percentage point increase in the bid-ask spread.

Finally, the researchers find that ChatGPT can help investors target specific areas of interest within long financial reports. For example, if they are interested in understanding a company’s dedication to environmental, social, and governance policies, they can prompt the chatbot to target that information and get a clearer view.

Both institutional and retail investors could benefit from ChatGPT’s ability to get to the point of the reports, says Kim, who adds that he is not sure yet whether ChatGPT in its current form can directly help investors build better portfolios or uncover the most lucrative stocks. Instead, he says, it could save them the time and effort of poring over complex documents and help them to better process the most important information. Thus, when making a trade, they can at least have a clearer idea of the fundamentals behind it.