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Using 10-K Text to Gauge Financial Constraints

Published online by Cambridge University Press:  20 October 2015

Andriy Bodnaruk
Affiliation:, University of Notre Dame, Mendoza College of Business, Notre Dame, IN 46556.
Tim Loughran*
Affiliation:, University of Notre Dame, Mendoza College of Business, Notre Dame, IN 46556.
Bill McDonald
Affiliation:, University of Notre Dame, Mendoza College of Business, Notre Dame, IN 46556.
*Corresponding author:


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 U.S. Securities and Exchange Commission (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, such as dividend omissions or increases, equity recycling, and underfunded pensions, better than widely used financial constraint indexes.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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