Does soft information determine credit risk? Text-based evidence from European banks*

Acheampong, A. K. and Elshandidy, T. (2021) Does soft information determine credit risk? Text-based evidence from European banks*. Journal of International Financial Markets, Institutions and Money. 75 1042-4431.

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Acheampong_Elshandidy_IRFA_2021_Does_soft_information_determine_credit_risk_Text-based_evidence_from_European_banks
Acheampong_Elshandidy_IRFA_2021_Does_soft_information_determine_credit_risk_Text_based_evidence_from_European_banks.pdf - Accepted Version
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Abstract:

This paper uses a supervised machine learning algorithm to extract relevant (soft) information from annual reports and examines whether such information determines credit risk (as measured by non-performing loans, Ohlson’s O-score, Altman’s Z-score, and credit rating downgrades). The paper also assesses how far both bank- and country-level characteristics influence variations in credit risks both within and between banks across 19 European countries between 2005 and 2017. Based on 1885 firm-year observations, we find that the text-based credit risk (soft) measure explains a substantial portion of the variation in NPLs, O-score, Z-score, and credit rating downgrades. We also find that bank-level characteristics and country-level characteristics are highly important for explaining variations in non-performing loans, O-score, and credit rating downgrades, as compared to Z-score. Overall, our results have implications for firms, regulators, and market participants who are seeking evidence on the credibility of annual reports in conveying relevant information that reflects actual credit risk.

Creators:

Acheampong, A. K. and Elshandidy, T.

Faculties, Divisions and Institutes:

Faculties > Faculty of Business & Law > Accounting & Finance

Date:

25 November 2021

Date Type:

Publication

Journal or Publication Title:

Journal of International Financial Markets, Institutions and Money

Volume:

Language:

English

DOI:

10.1016/j.intfin.2021.101303

ISSN:

1042-4431

Status:

Published / Disseminated

Refereed:

Yes

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