The debt market relevance of management earnings forecasts: evidence from before and during the credit crisis

Lakshmanan Shivakumar (), Oktay Urcan (), Florin P. Vasvari () and Li Zhang ()
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Lakshmanan Shivakumar: London Business School
Oktay Urcan: London Business School
Florin P. Vasvari: London Business School
Li Zhang: Rutgers Business School

Review of Accounting Studies, 2011, vol. 16, issue 3, No 4, 464-486

Abstract: Abstract We investigate the credit market’s response via changes in credit default swap (CDS) spreads to management earnings forecasts and evaluate the importance of these forecasts relative to earnings news during the periods before and during the recent credit crisis. We document that credit markets react significantly to management forecast news and that the reactions to forecast news are stronger than to actual earnings news. Consistent with the asymmetric payoffs to debt holders, the forecast news is mainly relevant for firms with poor credit rating or announcing bad news. We also show that the relevance of management forecasts to credit markets is particularly strong during periods of high uncertainty, as experienced during the recent credit crisis.

Keywords: Credit default swaps; Management earnings forecasts; Earnings announcements; Credit crisis (search for similar items in EconPapers)
JEL-codes: G01 G14 M41 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-011-9155-6

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