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Abstract

We use computational linguistics to examine whether a firm’s risk factors in prospec- tus disclosures provide unique information that is useful for pricing the initial public offerings of bonds. Credit ratings incorporate textual information related to the in- debtedness of the firm and its ability to repay its debt obligations. We find that the initial yield spread fully incorporates the risk factors embedded in credit ratings but additional risks associated with the financial condition of the firm and the covenants of the offering are useful in pricing. The amount of risk disclosed in the prospectus is also a good indicator of subsequent changes in bond yields. More importantly, we do not find any significant differences in the usefulness of risk factor disclosures in predicting pricing and bond outcomes between private and public firms. Our results suggest that mandated securities disclosure provides salient information to investors in both the private and public markets.

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