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

Lakshmanan Shivakumar, Oktay Urcan, Florin P. Vasvari, Li Zhang

Research output: Contribution to journalArticlepeer-review

45 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)464-486
Number of pages23
JournalReview of Accounting Studies
Volume16
Issue number3
DOIs
StatePublished - Sep 2011

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)

Keywords

  • Credit crisis
  • Credit default swaps
  • Earnings announcements
  • Management earnings forecasts

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