Measuring Credit Risk Using Qualitative Disclosure

52 Pages Posted: 31 Mar 2018 Last revised: 5 Jun 2020

See all articles by John Donovan

John Donovan

University of Notre Dame - Department of Accountancy

Jared N. Jennings

Washington University in St. Louis

Kevin Koharki

Purdue University

Joshua A. Lee

Brigham Young University

Date Written: June 4, 2020

Abstract

We use machine learning methods to create a comprehensive measure of credit risk based on qualitative information disclosed in conference calls and in management’s discussion and analysis section of the 10- K. In out-of-sample tests, we find that our measure improves our ability to predict future credit events (future bankruptcies, future interest spreads, and future credit rating downgrades) relative to existing credit risk measures developed by prior research (e.g., z-score). We also find our measure based on conference calls explains within-firm variation in future credit events; however, we find little evidence that the existing measures of credit risk developed by prior research explain within-firm variation in credit risk. Our measure has utility for both academics and practitioners, as the majority of firms do not have readily available measures of credit risk such as actively-traded CDS or credit ratings. Our study also adds to the growing body of research using machine-learning methods to gather information from conference calls and MD&A to explain key outcomes.

Keywords: credit risk, machine-learning, qualitative information

JEL Classification: M00, M10, M41

Suggested Citation

Donovan, John and Jennings, Jared N. and Koharki, Kevin and Lee, Joshua A., Measuring Credit Risk Using Qualitative Disclosure (June 4, 2020). Available at SSRN: https://ssrn.com/abstract=3149945 or http://dx.doi.org/10.2139/ssrn.3149945

John Donovan

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jared N. Jennings

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Kevin Koharki (Contact Author)

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Joshua A. Lee

Brigham Young University ( email )

United States
801-422-3154 (Phone)

HOME PAGE: http://https://marriottschool.byu.edu/directory/details?id=37414

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