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Analyst Forecast Characteristics and the Cost of Debt

46 Pages Posted: 19 Apr 2005 Last revised: 25 Oct 2009

Sattar Mansi

Virginia Tech

William F. Maxwell

SMU - Cox School

Darius P. Miller

Southern Methodist University (SMU) - Edwin L. Cox School of Business

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Date Written: October 1, 2009

Abstract

We examine the relation between analyst forecast characteristics and the cost of debt financing. Consistent with the view that the information contained in analysts’ forecasts is economically significant across asset classes, we find that analyst activity reduces bond yield spreads. We also find that the economic impact of analysts is most pronounced when uncertainty about firm value is highest (i.e., those with high idiosyncratic risk). Our results are robust to controls for the amount of private information in equity prices and the level of corporate disclosures. Overall, our the results indicate that the information contained in analyst forecasts is valued outside the equity market and provide an additional channel in which better information is associated with a lower cost of capital.

Keywords: Analyst, Information asymmetry, information risk, cost of capital, debt markets, bond markets

JEL Classification: G10, G12, G29, G32, J33

Suggested Citation

Mansi, Sattar and Maxwell, William F. and Miller, Darius P., Analyst Forecast Characteristics and the Cost of Debt (October 1, 2009). Available at SSRN: https://ssrn.com/abstract=699702 or http://dx.doi.org/10.2139/ssrn.699702

Sattar Mansi

Virginia Tech ( email )

William F. Maxwell (Contact Author)

SMU - Cox School ( email )

Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States

Darius P. Miller

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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