Earnings Predictability, Bond Ratings, and Bond Yields

Earnings Predictability, Bond Ratings, and Bond Yields We examine the role that earnings predictability plays in establishing a firm’s cost of debt capital by measuring its influence on establishing a new issue’s bond rating. In addition, we also examine the effects of earnings predictability on the initial pricing of the firm’s debt. Using new corporate bond issues from the period 1990–2000, our results indicate that the degree of predictability of a firm’s earnings is positively associated with a firm’s bond rating. Moreover, earnings predictability is also documented to be negatively associated with the offering yield. Importantly, bond rating classification accuracy is improved when specific measures of a firm’s earnings predictability are added to a robust model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Earnings Predictability, Bond Ratings, and Bond Yields

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2005 by Springer Science + Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-005-4766-2
Publisher site
See Article on Publisher Site

Abstract

We examine the role that earnings predictability plays in establishing a firm’s cost of debt capital by measuring its influence on establishing a new issue’s bond rating. In addition, we also examine the effects of earnings predictability on the initial pricing of the firm’s debt. Using new corporate bond issues from the period 1990–2000, our results indicate that the degree of predictability of a firm’s earnings is positively associated with a firm’s bond rating. Moreover, earnings predictability is also documented to be negatively associated with the offering yield. Importantly, bond rating classification accuracy is improved when specific measures of a firm’s earnings predictability are added to a robust model.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 1, 2005

References

  • Earnings Predictability, Information Asymmetry, and Market Liquidity
    Affleck-Graves, J.; Callahan, C. M.; Chipalkatti, N.
  • The Self Registration of Debt and Self Selection Bias
    Allen, D.; Lamy, R.; Thompson, G. R.
  • On the Existence of an Optimal Capital Structure: Theory and Evidence
    Bradley, M.; Jarrell, G. A.; Kim, E. H.
  • Smoothing Income in Anticipation of Future Earnings
    DeFond, M. L.; Park, C. W.
  • The informational Content of Bond Ratings
    Ederington, L. H.; Yawitz, J. B.; Roberts, B. E.
  • Is a Bond Rating Downgrading Bad News, Good News, or no News for Stockholders?
    Goh, J. C.; Ederington, L. H.

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