Assessing the Accuracy of Forward-Looking Information in Debt Contract Negotiations

38 Pages Posted: 21 Jan 2015 Last revised: 21 Jul 2015

See all articles by Peter R. Demerjian

Peter R. Demerjian

University of Washington - Michael G. Foster School of Business

John Donovan

University of Notre Dame - Department of Accountancy

Jared N. Jennings

Washington University in St. Louis

Date Written: June 6, 2015

Abstract

We examine the how perceived accuracy of forward-looking information obtained during debt contract negotiations affects the cost of debt. The lender uses forward-looking information to screen the borrower and assess creditworthiness. However, forward-looking information is not verifiable, and therefore the lender must estimate the accuracy of forward-looking information obtained from the borrower. We find evidence consistent with the lender using the borrower’s historical forecast accuracy to estimate the expected accuracy of forward-looking information. Specifically, we find that borrowers with more accurate forecasts receive lower interest rates. We also find this effect is less pronounced when other information sources are available to assess forward-looking information.

Keywords: Debt Contracting; Cost of Debt; Private Information; Management Forecasts; Voluntary Disclosure

JEL Classification: G30, M40, M41

Suggested Citation

Demerjian, Peter R. and Donovan, John and Jennings, Jared N., Assessing the Accuracy of Forward-Looking Information in Debt Contract Negotiations (June 6, 2015). Available at SSRN: https://ssrn.com/abstract=2553049 or http://dx.doi.org/10.2139/ssrn.2553049

Peter R. Demerjian (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

John Donovan

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jared N. Jennings

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

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