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Using 10-K Text to Gauge Financial Constraints

43 Pages Posted: 28 Sep 2013 Last revised: 27 Aug 2015

Andriy Bodnaruk

University of Illinois at Chicago

Tim Loughran

University of Notre Dame

Bill McDonald

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

Date Written: August 25, 2015

Abstract

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

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

Andriy Bodnaruk

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
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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