Finding Meaning in the Noise : Do Credit Rating Agencies Seek Out Information About Performance in 10-K Reports?

Using a simple textual measure of performance and innovation related keywords (PAI) in the 10-K reports, we document a significantly positive relation between PAI and credit ratings. Our results hold utilizing instrumental variable analysis, change analysis, firm fixed effects and propensity score matching approach. Our results also hold, using alternative measures of credit ratings and after controlling for different readability measures. The positive relation between PAI and credit ratings is more pronounced in firms with higher information asymmetry and weaker institutional monitoring. Further, the effect of the PAI on credit ratings is stronger during a period of financial crisis. Our findings highlight the significance of PAI in the annual reports in improving corporate credit ratings. More importantly, our findings suggest that given the increasing complexity of 10-K reports, credit rating agencies tend to filter relevant information using few keywords