43 Pages Posted: 28 Sep 2013 Last revised: 27 Aug 2015
Date Written: August 25, 2015
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.
Keywords: Financial constraints; textual analysis; dividend omissions; equity recycling; underfunded pensions
JEL Classification: G31, G32, D92
Suggested Citation: Suggested Citation
Bodnaruk, Andriy and Loughran, Tim and McDonald, Bill, Using 10-K Text to Gauge Financial Constraints (August 25, 2015). Forthcoming in the Journal of Financial and Quantitative Analysis. Available at SSRN: https://ssrn.com/abstract=2331544 or http://dx.doi.org/10.2139/ssrn.2331544