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

Author

Listed:
  • Lakshmanan Shivakumar

    (London Business School)

  • Oktay Urcan

    (London Business School)

  • Florin P. Vasvari

    (London Business School)

  • Li Zhang

    (Rutgers Business School)

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.

Suggested Citation

  • Lakshmanan Shivakumar & Oktay Urcan & Florin P. Vasvari & Li Zhang, 2011. "The debt market relevance of management earnings forecasts: evidence from before and during the credit crisis," Review of Accounting Studies, Springer, vol. 16(3), pages 464-486, September.
    • Handle: RePEc:spr:reaccs:v:16:y:2011:i:3:d:10.1007_s11142-011-9155-6
    DOI: 10.1007/s11142-011-9155-6
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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