b'ADVANCING KNOWLEDGETransforming markets: HOW AI-DRIVEN INSIGHTS ARE SHAPING THE FUTURE OF FINANCEBY ERIC STANN WITH MU NEWS AND INFORMATION concept of Image Firm Similarities (IFS) offers a Using artificial intelligence (AI) could be a gamenovel approach that is more dynamic and poten-changer in the fast-moving and constantly changingtially superior to traditional classification systems world of finance, helping drive greater efficiency,like Standard Industrial Classification (SIC), Global smarter decision-making and stronger risk manage- Industry Classification Standard (GICS) and North ment. As markets grow more complex, AI can provideAmerican Industry Classification System (NAICS).the tools for investment professionals to stay aheadAs businesses rapidly evolve, classification methods of the curve. that adapt swiftly to firms operational focus changes AI aids the analysis of vast amounts of databothare needed, Pukthuanthong said. An innovative clus-structured (such as financial statements) and unstruc- tering approach should offer the flexibility to reflectKuntara Pukthuanthongtured (such as news or social media sentiment)tothese rapid shifts and allow companies with diverse activities, such as Tesla, Amazon and Walmart, to extract actionable insights. By using machine learning THE PRICE OF BAD BEHAVIOR algorithms, financial firms can make more accuratesimultaneously belong to multiple industries, better predictions, identify trends, and optimize investmentcapturing modern enterprises multifaceted nature.strategies. IFS mimics how the brain processes visual informa-Kuntara Pukthuanthong, the Robert J. Trulaske,tion, enabling better alignment with investor-defined Study reveals overlooked factor in corporate integrity: peer groups. This means that IFS can identify which Jr. Professor of Finance, is developing several AI- How executives personal values influence their professional conduct. enabled tools that investors could one day use incompanies are truly similar in terms of operations, not their daily work.just based on conventional industry codes or textual BY ERIC STANN WITH MU NEWS AND INFORMATION could give them some leeway to avoid broachinganalysis. As a result, it performs well in strategies like such touchy subjects, Yore said. Variational Recurrent Neural Networks (VRNNs) pair trading (where two similar stocks are traded For years, weve watched business executives landtogether), diversification, and identifying industryFinancial themselves in jail for breaking the rules to get rich.So how do public auditors respond? Yore said thatMuch like scenes in a movie, this AI model transforms complex financial information into graph-based visu- momentum (tracking the overall trends of industries). markets are not Hollywood has even made movies about thesethe auditors do perceive it as a risk to their portfolio scandals. of clients. alizations to help predict stock prices. The modelsProcessing financial information static entities; ability to predict pixel changes in market narrativesPukthuanthong challenges traditional assumptionsthey pulsate with Traditionally, finance and accounting experts haveWhen companies have problems, auditors can be attranslates into robust forecasts for weekly returns focused on measures used to prevent fraud such asrisk too, Yore said. Auditors might charge more if the outperforming traditional price trend strategiesabout how investors process financial information,life, evolving and checking on executives, examining financial recordsaudit is risky, especially if theres a reputation for badwhile also considering firm-specific characteristics.highlighting the significant role that media distortionreacting to many and having strong rules. However, little attention hasexecutive behavior. This is because theres a higherplays as news spreads through the market. Rather Financial markets are not static entities; they pulsatethan attributing investor behavior solely to cognitivestimuli.been paid to how executives personally value honesty.chance that they might miss something important,with life, evolving and reacting to many stimuli, Adam Yore A study by University of Missouri researcher Adamlike financial fraud, which could hurt the auditorsbiases like overconfidence or the use of outdatedKuntaraYore shows that executives private life behaviorown reputation. They also find that some auditorsPukthuanthong said. This dynamism is reminiscentinformation, the study shows that the distortion of of frames in a cinematic reel, where each frame,news stories before they reach investors can be a key Pukthuanthongand their professional actions are closely connectedsimply drop the client. though a standalone snapshot, is intrinsically linked by examining managers with extramarital affairs,However, Yores research found that auditors arefactor in influencing market behavior.substance abuse problems, violent temperaments,to its predecessor, painting a broader narrative. primarily reactive and not proactive. They do notThe transmission of the original story in retelling or who are just allergic to telling the truth. raise fees until after these negative events are madeThe significance lies in the results: Achieving a Sharpearticles could potentially be biased, Pukthuanthong We do find that personally duplicitous executives arepublic. His study suggests that auditors manage theirratio of 2.94 for equally weighted portfolios andsaid. Several factors can drive the bias, including more likely to cook the books and engage in malfea- risk not just based on the company, but also consid- 2.47 for value-weighted portfolios demonstratesmemory, social and motivational factors, and the sance, said Yore, an associate professor of financeering the personal traits of the managers. However,the models ability to deliver strong risk-adjustedspecialization of news outlets.and the Stephen Furbacher Professor of Organiza- not all executives are treated the same, as auditorsreturns over time. By achieving an alpha of 55 weekly basis points adjusted for risk factors, this approachThis research enhances the understanding of how tional Change at the Trulaske College of Business.are more likely to forgive this behavior if it comesshows potential to significantly outperform conven- the media ecosystem influences investor behavior When these types of revelations become public, thefrom a major client. tional models, making it a powerful tool for investorsand market dynamics and suggests that the financial financial markets respond and reflect how the lackYores paper, Do auditors view off-the-clock misbe- seeking more precise market predictions. sector reconsider how financial news is consumed of personal ethics are destructive to a firms value.havior by company leadership as a signal of toneand acted upon in investment strategies.On average, such behavior costs their investors overat the top? was co-authored with Brandon ClineAssessing firm similaritiesPukthuanthongs papers, Just Look: Knowing Peers a hundred million dollars as their stock price drops. (Mississippi State University), Brant ChristensenUsing AI, Pukthuanthong introduces an innovativewith Image Representation, Animating Stock While the standards direct public accounting auditors(BYU), and Nathan Lundstrom (University of Kansas)method to assess firm similarity using visuals, whichMarkets and Transmission Bias in Financial News to look at the overall tone set by top executives, theyand published in The Accounting Review. has significant implications for financial marketsare being considered for publication.do not specifically require auditors to consider theand investment strategies. By analyzing four million personal behavior of these administrators and thisimages representing companies operations, the 24 | TRULASKE COLLEGE OF BUSINESS TRULASKE MAGAZINE 2024| 25'