Management Earnings Forecasts and the Cost of Debt

2019 ◽  
pp. 0148558X1988731
Author(s):  
Norio Kitagawa ◽  
Akinobu Shuto
Keyword(s):  
Default Risk ◽  
Lower Cost ◽  
Earnings Forecasts ◽  
Bond Market ◽  
Cost Of Debt ◽  
Yield Spread ◽  
Management Earnings Forecasts ◽  
Bond Yield ◽  
Earnings Benchmarks ◽  
The Cost

Prior studies have indicated that earnings are useful for bond market investors and that beating earnings benchmarks is related to a firm’s lower cost of debt. This study examines whether management earnings forecasts are related to a firm’s cost of debt. Our results indicate that (a) positive forecast innovations (i.e., forecasted increases in earnings) are related to a firm’s lower bond yield spread after controlling for the effect of other earnings benchmarks and (b) the negative association between positive forecast innovations and bond yield spread is weaker for firms with high default risk than for those with low default risk. The results suggest that management earnings forecasts are useful for investors in the Japanese bond market and are consistent with the findings in the equity market. However, the usefulness of management earnings forecasts in the bond market depends on a firm’s level of default risk. Our results suggest that bond investors discount the management earnings forecasts of firms with high default risk because such forecasts are more likely to have an optimistic bias.

Beating Earnings Benchmarks and the Cost of Debt

2008 ◽  
Vol 83 (2) ◽  
pp. 377-416 ◽  
Author(s):  
John (Xuefeng) Jiang
Keyword(s):  
Default Risk ◽  
Lower Cost ◽  
Cost Of Debt ◽  
Bond Markets ◽  
Yield Spread ◽  
Bond Yield ◽  
Earnings Benchmarks ◽  
Debt Market ◽  
The Cost ◽  
Firm Default

Prior research documents that firms tend to beat three earnings benchmarks—zero earnings, last year's earnings, and analyst's forecasted earnings—and that there are both equity market and compensation-related benefits associated with beating these benchmarks. This study investigates whether and under what conditions beating these three earnings benchmarks reduces a firm's cost of debt. I use two proxies for a firm's cost of debt: credit ratings and initial bond yield spread. Results suggest that firms beating earnings benchmarks have a higher probability of rating upgrades and a smaller initial bond yield spread. Additional analyses indicate that (1) the benefits of beating earnings benchmarks are more pronounced for firms with high default risk; (2) beating the zero earnings benchmark generally provides the biggest reward in terms of a lower cost of debt; and (3) the reduction in the cost of debt is attenuated but does not disappear for firms beating benchmarks through earnings management. In sum, results suggest that there are benefits associated with beating earnings benchmarks in the debt market. These benefits vary by benchmark, firm default risk, and method utilized to beat the benchmark. Among other implications, this evidence suggests that the relative importance of specific benchmarks differs across the equity and bond markets.

scholarly journals Consequences of CEO Overconfidence

2017 ◽  
Vol 6 (2) ◽  
pp. 94 ◽  
Author(s):  
Qiuhong Zhao ◽  
Dave A. Ziebart
Keyword(s):  
Financial Market ◽  
Earnings Forecasts ◽  
Cost Of Debt ◽  
Risk Exposure ◽  
Management Earnings Forecasts ◽  
Yield Spreads ◽  
Bond Yield ◽  
Ceo Selection ◽  
The Cost ◽  
The Impact

We test the impact of CEO overconfidence on the cost of debt and the impact of SOX on overconfidence via CEO selection. Our CEO overconfidence measure is based on the degree of optimism in management earnings forecasts, and the measure for the cost of debt is bond yield spreads. Our evidence supports that the market discounts CEO overconfidence by increasing the cost of borrowing. Moreover, we find that the financial market also incorporates past CEO overconfidence into bond pricing. We document that the board prefers to appoint a more rational CEO over an overconfident CEO. Our findings are consistent with Banerjee et al.’s (2015) argument that an independent board mitigates the costs of CEO overconfidence in terms of investment and risk exposure.

Does Corporate Governance Matter to Bondholders?

2005 ◽  
Vol 40 (4) ◽  
pp. 693-719 ◽  
Author(s):  
Mark S. Klock ◽  
Sattar A. Mansi ◽  
William F. Maxwell
Keyword(s):  
Corporate Governance ◽  
Lower Cost ◽  
Bond Market ◽  
Debt Financing ◽  
Cost Of Debt ◽  
Firm Level ◽  
Shareholder Protection ◽  
Level Data ◽  
Firm Level Data ◽  
The Cost

AbstractWe examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990–2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with the strongest management rights (strongest antitakeover provisions) and firms with the strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about 34 basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.

The Impact of Eliminating the 20-F Reconciliation on the Cost of Debt: An Exploratory Study

2019 ◽  
Vol 18 (1) ◽  
pp. 47-70
Author(s):  
Lucy Huajing Chen ◽  
Saiying Deng ◽  
Parveen P. Gupta ◽  
Heibatollah Sami
Keyword(s):  
Financial Reporting ◽  
Positive Association ◽  
Cost Of Debt ◽  
Yield Spread ◽  
Cross Sectional ◽  
Country Level ◽  
Bond Yield ◽  
The Cost ◽  
The Impact ◽  
The U.S

ABSTRACT In 2007, the U.S. Securities and Exchange Commission voted to eliminate the 20-F reconciliation requirement for foreign issuers listing their stocks or bonds in the U.S. capital markets and preparing their financial statements under International Financial Reporting Standards (IFRS). Distinct from prior research focusing on the equity market, we investigate the impact of eliminating the 20-F reconciliation on the cost of debt in the U.S. listed foreign bond market. Employing a difference-in-differences approach, we document that bond yield spread increases for foreign IFRS bond issuers after the elimination of 20-F reconciliation. The results suggest that bondholders, on average, view the elimination of 20-F reconciliation as an information loss. Cross-sectional analyses reveal that the positive association between the elimination of 20-F reconciliation and bond yield spread is more pronounced for firms with greater stock return volatility, lower institutional ownership, weaker reporting incentives, and higher country-level investor protection. JEL Classifications: M41; G15; G18.

scholarly journals Media Coverage and the Cost of Debt

2019 ◽  
Vol 55 (2) ◽  
pp. 429-471 ◽  
Author(s):  
Haoyu Gao ◽  
Junbo Wang ◽  
Yanchu Wang ◽  
Chunchi Wu ◽  
Xi Dong
Keyword(s):  
Information Asymmetry ◽  
Media Coverage ◽  
Default Risk ◽  
Cost Of Debt ◽  
Yield Spreads ◽  
Negatively Associated ◽  
Economic Mechanisms ◽  
The Cost ◽  
Yield Determinants ◽  
Firm Attributes

This paper investigates the relation between media coverage and offering yield spreads using a comprehensive dataset of 5,338 industrial bonds issued from 1990 to 2011. We find that media coverage is negatively associated with firms’ cost of debt. This association is robust to controlling for standard yield determinants, different model specifications, and endogeneity. We identify 4 economic channels through which media coverage influences the cost of debt: Information asymmetry, governance, liquidity, and default risk. Importantly, media coverage has an independent influence beyond the effects of these economic mechanisms and is not a proxy for other firm attributes.

scholarly journals Combined Effects of Auditing and Discretionary Accruals on the Cost of Debt: Evidence From Spanish SMEs

SAGE Open ◽  
2021 ◽  
Vol 11 (4) ◽  
pp. 215824402110525
Author(s):  
Juan L. Gandía ◽  
David Huguet
Keyword(s):  
Lower Cost ◽  
Substitution Effect ◽  
Discretionary Accruals ◽  
Jel Classification ◽  
Combined Effect ◽  
Cost Of Debt ◽  
Combined Effects ◽  
Relevant Effect ◽  
Accruals Quality ◽  
The Cost

Previous literature shows mixed evidence on the effect of discretionary accruals and auditing on the cost of debt. We hypothesize that, in the SMEs setting, auditing can act as a substitute for accruals quality, and thus audits may mitigate the effect of discretionary accruals on the cost of debt. Using a sample of Spanish SMEs, we find that auditing is negatively related with the cost of debt, while higher discretionary accruals are related with a lower cost of debt. Nonetheless, this effect is lower than that one observed for audits. When considering the combined effect of both variables, the effect of discretionary accruals is replaced by that of auditing. These results suggest that, among SMEs, discretionary accruals do not have a relevant effect on the cost of debt when companies are audited, supporting the hypothesis that there exists a substitution effect between discretionary accruals and auditing. JEL Classification: M42; G32

scholarly journals DETERMINANTS OF CORPORATE BOND YIELD: THE CASE OF MALAYSIAN BOND MARKET

2017 ◽  
Vol 17 (2) ◽  
Author(s):  
Norliza Che-Yahya ◽  
Ruzita Abdul-Rahim ◽  
Rasidah Mohd-Rashid
Keyword(s):  
Default Risk ◽  
Bond Market ◽  
Corporate Bond ◽  
Cross Sectional ◽  
Return On Equity ◽  
Trading Frequency ◽  
Bond Yield ◽  
Equity Ratio ◽  
The Individual ◽  
Individual Issue

Default risk has been recognized as one of the key determinants of bond yield. Past studies argue that default risk can be reflected by issue characteristics, issuer characteristics and interest rate behaviors on riskless security. As default risk is believed to be higher in developing markets due to the issue of illiquidity, capital inadequacy and a developing lending system, more empirical works must be focused on these markets. The present study examines the association between selected determinants and corporate bond yield in Malaysian market. Instead of focusing on the aggregate market level as has widely been carried out in previous studies, the present study concentrates on the individual issue level. The results of cross-sectional multiple regression analyses based on 61 observations in 2012 indicate that bond maturity, coupon payment, trading frequency, issuer’s rating, debt to equity ratio and return on equity ratio are the significant determinants of bond yield.Keywords: Corporate Bond Yield; Malaysian Bond Market.

Accounting for Biological Assets and the Cost of Debt

2015 ◽  
Vol 15 (2) ◽  
pp. 31-47 ◽  
Author(s):  
Abbie Daly ◽  
Hollis A. Skaife
Keyword(s):  
Lower Cost ◽  
Positive Association ◽  
Fair Value ◽  
Financial Statement ◽  
Cost Of Debt ◽  
Historical Cost ◽  
Country Study ◽  
Cross Country ◽  
One Year ◽  
The Cost

ABSTRACT Firms engaged in agriculture generate revenue from biological assets that manifest in the cultivation of bearer fruits and nuts, the tilling of crops, and the production of livestock and forestry. We investigate whether firms' cost of debt is associated with the measurement method they use to account for their biological assets. We find that the cost of debt is higher for firms using the fair value method of accounting for their biological assets relative to firms using historical cost. However, the positive association between the cost of debt and fair value is driven by firms that transform bearer plants, i.e., living plants that ultimately bear produce for more than one year. We also document that fair value combined with auditor attested IFRS use results in a lower cost of debt for firms transforming other types of biological assets. Our cross-country study focuses on a class of assets previously unexplored, and contributes to the literature that examines the consequences of fair value accounting for financial statement users. JEL Classifications: G39; H25; M41.

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