Earnings Predictability, Tariff Uncertainty, and Cost of Debt: Evidence from a Natural Experiment
53 Pages Posted: 15 Apr 2022 Last revised: 28 Apr 2023
Date Written: April 4, 2022
Based on a clean measure of earnings predictability from the tariff source, we show that enhancing firms’ earnings predictability has a causal effect on reducing cost of debt. Our tests exploit a unique trade policy that increases firms’ earnings predictability by reducing tariff uncertainty on Chinese imports without affecting the actual tariff rate: the U.S.-China Permanent Normal Trade Relations (PNTR). We find a significant drop in the loan spreads for firms affected by PNTR relative to other firms. We further show that such effects are indeed through the channel of increasing firms’ earnings predictability.
Keywords: earnings predictability, cost of debt, bank loans, tariff uncertainty, Permanent Normal Trade Relation
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