Using 10-K Text to Gauge Financial Constraints
University of Notre Dame - Mendoza College of Business
University of Notre Dame
University of Notre Dame - Mendoza College of Business - Department of Finance
August 25, 2015
Forthcoming in the Journal of Financial and Quantitative Analysis
Measuring the extent to which a firm is financially constrained is critical in assessing capital structure. Extant measures of financial constraints focus on macro firm characteristics such as age and size – variables highly correlated with other firm attributes. We parse 10-K disclosures filed with the SEC using a unique lexicon based on constraining words. We find that the frequency of constraining words exhibits very low correlation with traditional measures of financial constraints and predicts subsequent liquidity events – like dividend omissions or increases, equity recycling, and underfunded pensions – better than widely-used financial constraint indexes.
Number of Pages in PDF File: 43
Keywords: Financial constraints; textual analysis; dividend omissions; equity recycling; underfunded pensions
JEL Classification: G31, G32, D92
Date posted: September 28, 2013 ; Last revised: August 27, 2015
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