Debt Issue Motives and Earnings Optimism
44 Pages Posted: 18 Jan 2016 Last revised: 1 Apr 2018
Date Written: April 1, 2018
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: Suggested Citation