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- Creators: Debussy, Claude, 1862-1918
- Creators: Poulenc, Francis, 1899-1963
Description
While credit rating agencies use both forward-looking and historical information in evaluating a firm's credit risk, the role of forward-looking information in their rating decisions is not well understood. In this study, I examine the association between management earnings guidance news and future credit rating changes. While upward earnings guidance is not informative for credit rating changes, downward earnings guidance is significantly and positively associated with both the likelihood and speed of rating downgrades. In cross-sectional analyses, I find that downward guidance is especially informative in two important circumstances: (i) when a firm's current credit rating is overly optimistic compared to a model predicted rating, and (ii) when the relevance or reliability of alternative information sources is lower. In addition, I find that downward guidance is associated with lower future cash flows, as well as a higher volatility of future cash flows. Overall, the results are consistent with credit rating agencies incorporating voluntary bad news disclosures into their decisions about whether and when to downgrade a firm.
ContributorsLin, An-Ping (Author) / Hillegeist, Stephen (Thesis advisor) / Hugon, Jean (Thesis advisor) / Call, Andrew (Committee member) / Dhaliwal, Dan (Committee member) / Arizona State University (Publisher)
Created2015
Description
When managers provide earnings guidance, analysts normally respond within a short time frame with their own earnings forecasts. Within this setting, I investigate whether financial analysts use publicly available information to adjust for predictable error in management guidance and, if so, the explanation for such inefficiency. I provide evidence that analysts do not fully adjust for predictable guidance error when revising forecasts. The analyst inefficiency is attributed to analysts' attempts to advance relationship with the managers, analysts' compensation not tie to forecast accuracy, and their forecasting ability. Finally, the stock market acts as if it does not fully realize that analysts respond inefficiently to the guidance, introducing mispricing. This mispricing is not fully corrected upon earnings announcement.
ContributorsLin, Kuan-Chen (Author) / Mikhail, Michael (Thesis advisor) / Hillegeist, Stephen (Committee member) / Hugon, Jean (Committee member) / Arizona State University (Publisher)
Created2012
ContributorsPoulenc, Francis, 1899-1963 (Composer)
ContributorsPoulenc, Francis, 1899-1963 (Composer)
ContributorsPoulenc, Francis, 1899-1963 (Composer)
ContributorsPoulenc, Francis, 1899-1963 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)