The Debt Market Relevance of Management Earnings Forecasts: Evidence from Before and During the Credit Crisis

31 Pages Posted: 8 Apr 2011

See all articles by Lakshmanan Shivakumar

Lakshmanan Shivakumar

London Business School

Oktay Urcan

University of Illinois at Urbana-Champaign

Florin P. Vasvari

London Business School

Li Zhang

Rutgers, The State University of New Jersey - Accounting

Date Written: February 6, 2011

Abstract

We investigate the credit market’s response via changes in credit default swap (CDS) spreads to management earnings forecasts and evaluate the importance of these forecasts relative to earnings news during the periods before and during the recent credit crisis. We document that credit markets react significantly to management forecast news and that the reactions to forecast news are stronger than to actual earnings news. Consistent with the asymmetric payoffs to debt holders, the forecast news is mainly relevant for firms with poor credit rating or announcing bad news. We also show that the relevance of management forecasts to credit markets is particularly strong during periods of high uncertainty, as experienced during the recent credit crisis.

Keywords: Voluntary Disclosure, Credit Crisis, Credit Default Swap

JEL Classification: M41

Suggested Citation

Shivakumar, Lakshmanan and Urcan, Oktay and Vasvari, Florin P. and Zhang, Li, The Debt Market Relevance of Management Earnings Forecasts: Evidence from Before and During the Credit Crisis (February 6, 2011). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1804131

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

Oktay Urcan (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
4009 BIF MC-520
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

HOME PAGE: http://business.illinois.edu/profile/oktay-urcan/

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Li Zhang

Rutgers, The State University of New Jersey - Accounting ( email )

1 Washington Park, Room 996
Newark, NJ 07102
United States

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