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
November 18, 2013
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, D92working papers series
Date posted: September 28, 2013 ; Last revised: November 19, 2013
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