Managerial Sentiment and Default Risk: Evidence from China

This study examines the relationship between managerial sentiment and default risk in China. Using a dataset of managerial sentiment derived from textual emotional tone analysis of corporate reports, and a sample of 13,137 firm-year observations from 2010 to 2022 for publicly listed A-share firms, we find that positive managerial sentiment significantly reduces firm default risk. In addition, the mitigating effect of managerial sentiment on default risk is more pronounced under lower ownership concentration, lower research and development expenditure intensity, lower industry competition, and higher firm leverage. Mediation analysis indicates that both financial constraints and environmental, social, and governance ratings provide channels through which managerial sentiment influences default risk. The results are robust to alternative measures of managerial sentiment and default risk. Endogeneity concerns are alleviated through two-stage least squares regression and propensity score matching. This study offers practical implications for investors, corporate managers, and policymakers seeking to mitigate firm financial distress risk in modern capital markets.