Earnings Predictability, Bond Ratings, and Bond Yields

Aaron Crabtree () and John Maher ()

Review of Quantitative Finance and Accounting, 2005, vol. 25, issue 3, 233-253

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. Copyright Springer Science + Business Media, Inc. 2005

Date: 2005
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DOI: 10.1007/s11156-005-4766-2

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