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

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 13 years 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.