The Impact of Text-Based Financial Constraints on Stock Price Crash Risk: Evidence From the UK Firms

This paper employs a textual analysis approach to quantify financial constraints information from the narrative sections of annual reports in the UK firms. Then, the paper examines the impact of this information on the stock price crash risk in 250 firms from 2005 to 2021. The paper also analyses the moderating role of adopting the International Financial Reporting Standards (IFRS) on the impact of text-based financial constraints on stock price crash risk. It is found that text-based financial constraints are positively associated with stock crash risk measures. It is also observed that adopting the IFRS weakens the positive impact of financial constraints on stock price crash risk. These results are robust to several controls and model specifications. The findings also have several implications for investors and other market participants for seeking evidence of the credibility of annual reports in reflecting relevant information that highlights financial constraints.