(1) School of Accountancy, University of Nebraska-Lincoln, CBA 389, P.O. Box 880488, Lincoln, NE, 68588-0488;(2) Department of Accounting and Information Systems, Pamplin College of Business, Virginia Tech, Blacksburg, VA, 24061-0101
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.JEL Classification:
