Abstract

http://ssrn.com/abstract=2331544
 


 



Using 10-K Text to Gauge Financial Constraints


Andriy Bodnaruk


University of Notre Dame - Mendoza College of Business

Tim Loughran


University of Notre Dame

Bill McDonald


University of Notre Dame - Mendoza College of Business - Department of Finance

November 18, 2013


Abstract:     
Financial constraints — the wedge between the costs of external and internal funds — dictate the relevance of financial structure. We propose a new measure of financial constraints based on qualitative information contained in corporate disclosures. We parse 10-K disclosures filed with the Securities and Exchange Commission (SEC) to measure a document’s tone as indicated by the percentage of negative words. We find that the frequency of negative words exhibits very low correlation with traditional measures of financial constraints such as size and predicts subsequent liquidity events — like dividend cuts or omissions, debt downgrades, and asset growth — better than widely-used financial constraint indexes.

Number of Pages in PDF File: 46

Keywords: Financial constraints, textual analysis, dividend omissions, debt downgrades

JEL Classification: G31, G32, D92

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Date posted: September 28, 2013 ; Last revised: November 19, 2013

Suggested Citation

Bodnaruk, Andriy and Loughran, Tim and McDonald, Bill, Using 10-K Text to Gauge Financial Constraints (November 18, 2013). Available at SSRN: http://ssrn.com/abstract=2331544 or http://dx.doi.org/10.2139/ssrn.2331544

Contact Information

Andriy Bodnaruk
University of Notre Dame - Mendoza College of Business ( email )
Notre Dame, IN 46556-5646
United States
Tim Loughran (Contact Author)
University of Notre Dame ( email )
Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)
Bill McDonald
University of Notre Dame - Mendoza College of Business - Department of Finance ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
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