Bankruptcy Prediction from 10-K Narratives: Evidence from Interpretable Text Scores and Accounting Baselines

Bankruptcy is a low-frequency but high-impact corporate event, making early risk identification important for creditors, investors, regulators, and risk managers. Traditional bankruptcy-prediction models rely primarily on accounting ratios, but these measures may reflect financial deterioration only after it appears in reported financial statements. Narrative disclosures in annual 10-K filings may therefore provide incremental warning signals about emerging distress. This study examines whether 10-K narratives improve bankruptcy prediction beyond conventional accounting variables. Using firm-year observations matched to 10-K text, SEC financial statement data, and bankruptcy events from the Florida-UCLA-LoPucki Bankruptcy Research Database, the analysis evaluates bankruptcy risk over the year following the 10-K filing date. The paper develops a transparent Pre-Bankruptcy Stress (PB Stress) Score, a dictionary-based measure designed to capture distress-specific language related to liquidity and funding stress, debt covenant and refinancing stress, operating deterioration, restructuring and legal distress, and business fragility. The score is evaluated against a five-variable accounting baseline and a Loughran-McDonald dictionary benchmark. In the primary one-year holdout test, adding the PB Stress Score increases AUC from 0.8323 to 0.9019 and raises top-decile bankruptcy capture from 44.12% to 64.71%. The positive incremental pattern remains visible across bootstrap inference, alternative accounting benchmarks, alternative outcome definitions, and out-of-time validation. The findings indicate that distress-specific 10-K narratives provide interpretable incremental information for bankruptcy-risk monitoring beyond conventional accounting ratios.