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Earnings Predictability, Bond Ratings, and Bond Yields

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  • Aaron Crabtree
  • John Maher

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

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  • Aaron Crabtree & John Maher, 2005. "Earnings Predictability, Bond Ratings, and Bond Yields," Review of Quantitative Finance and Accounting, Springer, vol. 25(3), pages 233-253, November.
    • Handle: RePEc:kap:rqfnac:v:25:y:2005:i:3:p:233-253
    DOI: 10.1007/s11156-005-4766-2
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    Cited by:

    1. Kenneth Lorek & G. Willinger & Allen Bathke, 2008. "Statistically based quarterly earnings expectation models for nonseasonal firms," Review of Quantitative Finance and Accounting, Springer, vol. 31(1), pages 105-119, July.
    2. Alex Petkevich & Andrew Prevost, 2018. "Managerial ability, information quality, and the design and pricing of corporate debt," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 1033-1069, November.
    3. Hong-Yi Chen & Hsiao-Yin Chen, 2016. "Inconsistent Bond Pricing in a Rational Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-17, September.
    4. Ferrer, Elena & Santamaría, Rafael & Suárez, Nuria, 2019. "Does analyst information influence the cost of debt? Some international evidence," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 323-342.
    5. Kenneth Shaw, 2012. "CEO incentives and the cost of debt," Review of Quantitative Finance and Accounting, Springer, vol. 38(3), pages 323-346, April.
    6. Melissa Woodley & Peter DaDalt & John R. Wingender, 2020. "The price and volume response to earnings announcements in the corporate bond market," The Financial Review, Eastern Finance Association, vol. 55(4), pages 669-696, November.
    7. Mohamed A. Elbannan, 2016. "Accounting Discretion and the Market Disciplining of Bank Risk-taking Behavior: An Assessment of the Effectiveness of Egyptian Banking Reforms from an Accounting Perspective," Accounting and Finance Research, Sciedu Press, vol. 5(4), pages 1-1, November.
    8. Shikhil Munjal & Gurcharan Singh & Palvi Jearth, 2021. "Assessing the Consistency among Accounting Measures of Earnings Quality: A Study of Stocks Listed on National Stock Exchange 500," International Journal of Economics and Financial Issues, Econjournals, vol. 11(4), pages 19-26.
    9. Katsuo, Yuko, 2008. "Earnings quality, accruals and subjective goodwill accounting," LSE Research Online Documents on Economics 6912, London School of Economics and Political Science, LSE Library.
    10. Tsung-Kang Chen & Hsien-Hsing Liao & Hsiao-Chun Huang, 2014. "Macroeconomic risks of supply chain counterparties and corporate bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 463-481, October.
    11. Alan V. S. Douglas & Alan G. Huang & Kenneth R. Vetzal, 2016. "Cash flow volatility and corporate bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 417-458, February.
    12. Semih Tartaroglu & Michael Imhof, 2017. "Insider trading and response to earnings announcements: the impact of accelerated disclosure requirements," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 315-336, August.
    13. Mingzhi Liu & Michel Magnan, 2016. "Conditional conservatism and the yield spread of corporate bond issues," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 847-879, May.
    14. Hang Luo & Linfeng Chen, 2019. "Bond yield and credit rating: evidence of Chinese local government financing vehicles," Review of Quantitative Finance and Accounting, Springer, vol. 52(3), pages 737-758, April.
    15. Mohammed Mehadi Masud Mazumder, 2016. "Exploring the Impact of Ownership Structure on Earnings Predictability: Insights from Japan," Indian Journal of Corporate Governance, , vol. 9(2), pages 97-121, December.
    16. Ting-Kai Chou, 2013. "Information content of credit ratings in pricing of future earnings," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 217-250, February.
    17. Du, Ning & Budescu, David V. & Shelly, Marjorie K. & Omer, Thomas C., 2011. "The appeal of vague financial forecasts," Organizational Behavior and Human Decision Processes, Elsevier, vol. 114(2), pages 179-189, March.
    18. Charlene P. Spiceland & Leo L. Yang & Joseph H. Zhang, 2016. "Accounting quality, debt covenant design, and the cost of debt," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1271-1302, November.

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