Is Financial Analysis Doomed? The Birth of “Reactive Valuation” Analysis

Abstract

The purpose of this paper is to examine how firms’ information landscape has changed in recent years and why this could be problematic for those engaged in financial analysis and equity valuation. Our central contention is that two main forces of change – lower information costs and faster information processing – have completely disrupted the traditional concept of financial analysis. In response to this disruption, financial analysis will now increasingly take the form of “reactive valuation.” In addition to examining our main contention, we introduce a new term into the literature, called “reactive valuation,” which we define as the ultra short-term valuation of an equity, lasting from a few seconds to a few hours, based on information primarily published through social media channels. It may be later corroborated by factually based information or remain unsubstantiated. It may or may not be from an authoritative source. It also may not relate clearly or directly to the valuation of the underlying asset. However, based mostly on the tools of artificial intelligence and natural language processing, “reactive valuation” will invariably provide an opportunity for statistical arbitrage during the short time it takes for the market to digest the information. Financial analysts who survive these two forces of change will have detailed knowledge of this new form of financial analysis.