Debt Issue Motives and Earnings Optimism

44 Pages Posted: 18 Jan 2016 Last revised: 1 Apr 2018

See all articles by R. David McLean

R. David McLean

Georgetown University - Department of Finance

Berardino Palazzo

Board of Governors of the Federal Reserve System

Date Written: April 1, 2018

Abstract

We study the motives for long-term debt issues. The primary use of debt issue proceeds is repurchasing noncurrent debt. These repurchases combined with rollovers consume 57% of proceeds, so most debt issues are not used for investment and operations and do not impact leverage. Regardless of proceed use, debt issues are associated with overoptimistic analysts’ earnings forecasts and subsequent earnings declines. Even among liquidity squeezed firms, earnings optimism is a deciding factor in issuance decisions, as lower optimism leads to fewer debt issues and reduced investment. Our findings suggest that firm-specific sentiment has a first-order impact on debt issue decisions.

Keywords: debt issues; analyst forecast error; earnings surprises; rollovers; liquidity squeezes; leverage; maturity structure

JEL Classification: G30; G31; G32

Suggested Citation

McLean, R. David and Palazzo, Berardino, Debt Issue Motives and Earnings Optimism (April 1, 2018). Available at SSRN: https://ssrn.com/abstract=2716753 or http://dx.doi.org/10.2139/ssrn.2716753

R. David McLean

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC Washington DC 20057
United States

Berardino Palazzo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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