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Qualitative Disclosure in Corporate Filings and Loan Terms

The Securities and Exchange Commission (SEC) requires firms to disclose and discuss trends concerning their liquidity, capital resources, and operations. However, there is an ongoing debate on the value of these textual narratives. This study investigates the relation between a firm's qualitative disclosure and its loan terms. In particular, I use loan terms to study how textual disclosure relates to banks' assessment of a firm's creditworthiness. An analysis of the linguistic tone of the Management's Discussion and Analysis (MD&A) section in firms' 10-K filings reveals a significant association between a firm's disclosure and its loan terms. Firms with a more negative tone face higher loan spreads and stricter contract terms, such as requiring collateral and shorter maturities, in its subsequent issuance. In line with banks limiting their exposure to credit risk using the contract terms, the tone has predictive abilities concerning future firm failures, even after controlling for known default predictors. Overall, these findings suggest that textual narratives contain incremental information about a firm's economic situation as intended by regulation and loan terms reflect this information accordingly.