Predicting the future financial performance of Islamic banks: a sentiment analysis approach

Javid Iqbal · Muhammad Khalid Sohail

12 citations0/0 files storedInternational Journal of Islamic and Middle Eastern Finance and Management

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Islamic Finance and Banking Studies Auditing, Earnings Management, Governance Stock Market Forecasting Methods

Abstract

Purpose This study aims to predict the financial performance of Islamic banks with sentiments of management from the textual information in annual reports. Design/methodology/approach The study uses data from 33 Islamic banks in six Islamic countries from 2006 to 2020. The authors estimate the model using the system GMM because it helps dealing with endogeneity problem, which are inherent in panel data. Findings The findings of the study reveal that there is a strong relationship between the sentiment expressed by management in annual reports and the current (future) financial performance of Islamic banks. The higher the positive sentiments of management, the better financial performance. In addition, the study also suggests that negative sentiments using term frequency-inverse document frequency is linked to a decrease in banks’ financial performance. Research limitations/implications The study does not present the Islamic view on sentiment analysis in the context of Islamic scriptures due to the unavailability of a relevant dictionary. Practical implications The findings of the study suggest that developing accurate models with the help of textual information for performance prediction of Islamic banks help shareholders, regulators and policymakers avoid devastating events. Using textual information may also help reduce the information asymmetry between the management and shareholders, which may lead to more efficient bank supervision. The study can also help investors evaluate their prospective investments in the Islamic bank. Originality/value To the best of the authors’ knowledge, this study is the first of its kind that uses management sentiments for performance prediction of the Islamic banking sector. It may add a valuable contribution to the existing literature.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 2011When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks 2007Giving Content to Investor Sentiment: The Role of Media in the Stock Market 2008Annual report readability, current earnings, and earnings persistence 2010The Information Content of Forward‐Looking Statements in Corporate Filings—A Naïve Bayesian Machine Learning Approach 2006Factors influencing the profitability of domestic and foreign commercial banks in the European Union 1987Earnings Innovations, Earnings Persistence, and Stock Returns 2008Are Investors Influenced By How Earnings Press Releases Are Written?

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