The Impact of Meeting or Beating Analysts' Cash Flow Forecasts on a Firm's Cost of Debt
Posted: 26 Apr 2010
Date Written: April 1, 2010
Our research examines the importance and influence of meeting or beating analysts’ cash flow forecasts on a firm’s cost of debt. We examine three important metrics related to a firm’s cost of debt: initial bond rating, bond yield, and subsequent changes in bond ratings. Our results indicate firms meeting/beating analysts’ cash flow forecasts have higher initial bond ratings as well as lower initial bond yields. We also find firms meeting or beating cash flow forecasts have a higher probability of receiving a debt rating upgrade and a lower probability of a ratings downgrade compared to firms missing cash flow forecasts. A direct comparison of the importance of meeting/beating cash flow versus earnings benchmarks indicates debt market participants appear to value both types of forecasts, but unlike previous equity market findings, neither forecast alone appears to be more important than the other for debt market participants.
Keywords: Cost of Debt, Cash Flow Forecasts, Bond Ratings, Earnings Forecasts
JEL Classification: C12, G12, M41
Suggested Citation: Suggested Citation