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The impact of news articles and corporate disclosure on credit risk valuation

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  • Tsai, Feng-Tse
  • Lu, Hsin-Min
  • Hung, Mao-Wei

Abstract

In this study, we investigate how qualitative information in newspapers and corporate filings affects credit risk valuation in the credit default swap (CDS) market. We adopted news coverage and news sentiment to quantify text information from news articles and quantified the qualitative risk disclosures of individual firms in their corporate filings (i.e., Form 10-K and 10-Q). Our empirical study, based on 13years of CDS data, provides several conclusions. First, more news coverage and negative news sentiment increase credit risk. Second, a higher overall volume of risk factor disclosure in corporate public filings is linked to a higher credit risk for debt issuers. Moreover, financial risk has the strongest effect among the five types of risk disclosures we considered. Overall, our results suggest that text information from newspapers and corporate filings contains incremental informational content for firms’ credit risk evaluations. These two information sources play distinctive roles in signaling issuers’ future credit conditions.

Suggested Citation

  • Tsai, Feng-Tse & Lu, Hsin-Min & Hung, Mao-Wei, 2016. "The impact of news articles and corporate disclosure on credit risk valuation," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 100-116.
    • Handle: RePEc:eee:jbfina:v:68:y:2016:i:c:p:100-116
    DOI: 10.1016/j.jbankfin.2016.03.018
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    4. Li, Jingyu & Li, Jianping & Zhu, Xiaoqian, 2020. "Risk dependence between energy corporations: A text-based measurement approach," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 33-46.
    5. Peng Liang & Nan Hu & Ling Liu & Ting Zhang, 2023. "Managerial tone and investors' hedging activities: Evidence from credit default swaps," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 3971-3998, December.
    6. Montes, Gabriel Caldas & Nicolay, Rodolfo & Pereira, Flavio, 2022. "Does fiscal sentiment matter for sovereign risk?," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 18-30.
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    8. Rambaccussing, Dooruj & Kwiatkowski, Andrzej, 2020. "Forecasting with news sentiment: Evidence with UK newspapers," International Journal of Forecasting, Elsevier, vol. 36(4), pages 1501-1516.
    9. Nawrocka Ewelina, 2018. "Income Risk in Property Valuation for Loan Security Purposes," Real Estate Management and Valuation, Sciendo, vol. 26(2), pages 12-22, June.
    10. Giulio Gariano & Gianluca Viggiano, 2022. "Press news and social media in credit risk assessment: the experience of Banca d’Italia’s In-house Credit Assessment System," Temi di discussione (Economic working papers) 24, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Credit default swap; Credit risk; News coverage; News sentiment; Risk factor disclosure;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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