Analyst Forecast Characteristics and the Cost of Debt
Virginia Polytechnic Institute & State University
William F. Maxwell
SMU - Cox School
Darius P. Miller
Southern Methodist University (SMU) - Edwin L. Cox School of Business
January 6, 2010
Review of Accounting Studies, Forthcoming
We examine the relation between analyst forecast characteristics and the cost of debt financing. Consistent with the view that the information contained in analysts’ forecasts is economically significant across asset classes, we find that analyst activity reduces bond yield spreads. We also find that the economic impact of analysts is most pronounced when uncertainty about firm value is highest (i.e., those with high idiosyncratic risk). Our results are robust to controls for the amount of private information in equity prices and the level of corporate disclosures. Overall, our the results indicate that the information contained in analyst forecasts is valued outside the equity market and provide an additional channel in which better information is associated with a lower cost of capital.
Keywords: Analyst forecasts, information, disclosure, cost of debt
JEL Classification: G14, M41Accepted Paper Series
Date posted: January 7, 2010
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