What's in the Text? - a Text-Based Financial Constraint Index for Indian Manufacturing Firms

The study proposes a text-based index for financial constraints using the phrase-matching algorithm. The index captures the severity of financial constraints by calculating the percentage of constraint phrases in the annual report. Using robust validation, the study finds that the text-based index (PMM index) outperforms the conventional financial constraint proxies in capturing the severity of financial constraint. The PMM index has higher accuracy and f-score and predicts the liquidity events, such as dividend omission and dividend increase, better than the widely used financial constraint indexes