Do narrative-related disclosures predict corporate failure? Evidence from UK non-financial publicly quoted firms

Abstract

By creating a comprehensive corporate failure-related lexicon, this paper explores the incremental explanatory power of narrative-related disclosures in predicting corporate failure. We find that corporate failure-related narrative disclosures significantly predict firms' failure up to two years ahead of actual failure. Additionally, we find that a financially distressed firm would become more vulnerable when financial constraints befall, which in turn would precipitate corporate failure. Various robustness tests assure the credibility of the explanatory ability of corporate failure-related narrative disclosures to predict corporate failure. Collectively, our results show the feasibility of these narrative-related disclosures in improving the explanatory power of models that predict corporate failure.