The value of financial statements in predicting the innovation potential of SMEs in science and technology: a machine learning approach
Prof. Bin KE
Professor of Accounting and Provost’s Chair, National University of Singapore
Date: 19 February 2024 (Monday)
Time: 10:30 am to 12:00 pm
Host: Prof. Jason XIAO, Professor in Accounting
Globally, governments invest billions in promoting innovation in science and technology among small and medium-sized enterprises (SMEs). This investment is typically allocated based on expert evaluations of grant applications. However, concerns persist about the effectiveness of these expert evaluations. Using China’s InnoFund grant applications in science and technology, we explore whether an advanced machine learning model, XGBoost, built based on most recent financial statements from grant applications, can better predict innovation potential compared to a XGBoost model based on expert evaluations. We measure a firm’s innovation potential using patent applications and VC/PE funding post-application. We find that the XGBoost model based solely on financial data outperforms the XGBoost model relying on expert evaluation scores. This suggests that financial statements contain predictive insights overlooked by experts. Furthermore, we find no evidence that combining the two approaches enhances prediction performance, indicating that experts may not add incremental value to the prediction performance. An analysis of SHAP values reveals differences in the evaluation criteria used by experts and our machine learning models. Experts tend to focus on metrics such as net income before taxes and cash reserves, while our machine learning models prioritize various financial line items.
Prof. Ke is a Professor of Accounting and Provost’s Chair at the NUS Business School since 2015. He is a holder of the prestigious “Chang Jiang Scholar” title awarded by China’s Ministry of Education and the Li Ka Shing Foundation. He was the President of the Chinese Accounting Professors Association of North America (www.capana.net), a leading academic organization that promotes high-quality accounting research on China, the Asia Pacific region, and other emerging market economies.
Prof. Ke’s primary teaching interests include financial accounting principles, financial statement analysis, and doctoral seminars on empirical financial accounting research. He has also taught U.S. federal income taxation.
All are welcome!