Using Annual Report Sentiment as a Proxy for Financial Distress in U.S. Banks

Priyank Gandhi, Tim Loughran, Bill McDonald

Research output: Contribution to journalArticlepeer-review

22 Scopus citations


Current measures of bank distress find marginal value in predictive variables beyond a capital adequacy ratio and tend to miss extreme events impacting the entire sector. The authors advocate a new proxy for bank distress: sentiment measures from banks’ annual reports. After controlling for popular forecasting variables used in the literature, they find that more negative sentiment in the annual report is associated with larger delisting probabilities, lower odds of paying subsequent dividends, higher subsequent loan loss provisions, and lower future return on assets. The findings suggest that regulators could augment current early warning systems for banks and the banking sector—where the measures are based exclusively on financial statement data—by using the frequency of negative words in banks’ annual reports.

Original languageEnglish (US)
Pages (from-to)424-436
Number of pages13
JournalJournal of Behavioral Finance
Issue number4
StatePublished - Oct 2 2019

All Science Journal Classification (ASJC) codes

  • Experimental and Cognitive Psychology
  • Finance


  • Distressed delisting
  • Financial distress
  • Financial institutions
  • Negative sentiment
  • Textual analysis


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