The Impact of Meeting or Beating Analysts' Cash Flow Forecasts on a Firm's Cost of Debt

Posted: 26 Apr 2010

See all articles by Christopher T. Edmonds

Christopher T. Edmonds

University of Delaware

Jennifer Echols Edmonds

Virginia Polytechnic Institute & State University

John J. Maher

Virginia Tech

Date Written: April 1, 2010

Abstract

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

Edmonds, Christopher T. and Edmonds, Jennifer Echols and Maher, John J., The Impact of Meeting or Beating Analysts' Cash Flow Forecasts on a Firm's Cost of Debt (April 1, 2010). Available at SSRN: https://ssrn.com/abstract=1595748

Christopher T. Edmonds

University of Delaware ( email )

Newark, DE 19711
United States

Jennifer Echols Edmonds

Virginia Polytechnic Institute & State University ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

John J. Maher (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

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