Assessing the Accuracy of Forward-Looking Information in Debt Contract Negotiations
38 Pages Posted: 21 Jan 2015 Last revised: 21 Jul 2015
Date Written: June 6, 2015
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: Suggested Citation