The Impact of News Articles and Corporate Disclosure on Credit Risk Valuation

Abstract

This paper elucidates the importance of the information content of text information from public sources, including newspapers and corporate filings, has for credit market investors. We adopted news coverage and news tone to quantify text information from news articles. We captured the qualitative risk disclosure of individual firms by quantifying textual information in the risk factor disclosures of corporate filings (i.e., Form 10-K and 10-Q). Our empirical study yielded three main findings. First, net news tone reduces credit risk. Second, more news coverage leads to a higher credit risk, after correcting for the selection problem caused by firm size, industry, past stock returns and volatilities, a result suggesting that while positive news has a positive impact on credit risk, information from the news media can increase volatility, worsening credit risk. Finally, more risk factor disclosure leads to lower credit risk for debt issuers, but systematic risk and tax risk disclosure are positively associated with credit risk. Overall, our results suggest that text information from newspapers and corporate filings contain incremental information content for firms’ credit risk evaluations. Moreover, these two information sources play distinctive roles in signaling firms’ future credit conditions.