Beating market expectations and the pricing of firms' probablity of defaulty

Mauricio A. Melgarejo

doi:10.1016/j.jcae.2018.02.005

Beating market expectations and the pricing of firms' probablity of defaulty

Mauricio A. Melgarejo

Research output: Contribution to journal › Article › peer-review

Abstract

This study explores the impact of beating analysts' forecasts on investors' perceptions about firms' default probability. The information contained in analysts’ forecasts, both earnings and revenues, provides additional information to investors in pricing CDSs. While previous research has focused on the impact of beating analysts’ earnings forecasts , this study shows that firms that beat analysts' revenue forecasts also experience, on average, a decrease in the CDS premium around the earnings announcement date. This study also documents that the effect is stronger when firms beat/miss both earnings and revenue forecasts. When firms beat (miss) earnings and miss (beat) revenues, the effect of earnings is the dominant signal. These effects are stronger for firms with high levels of default risk.

Original language	American English
Journal	Journal of Contemporary Accounting & Economics
Volume	14
Issue number	1
DOIs	https://doi.org/10.1016/j.jcae.2018.02.005
State	Published - Feb 2018

Keywords

analysts forecasts
cost of debt
default risk

Disciplines

Business
Accounting
Business Administration, Management, and Operations
Business and Corporate Communications
Corporate Finance
Finance and Financial Management
Other Business

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10.1016/j.jcae.2018.02.005License: Unspecified

Cite this

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title = "Beating market expectations and the pricing of firms' probablity of defaulty",

abstract = " This study explores the impact of beating analysts' forecasts on investors' perceptions about firms' default probability. The information contained in analysts{\textquoteright} forecasts, both earnings and revenues, provides additional information to investors in pricing CDSs. While previous research has focused on the impact of beating analysts{\textquoteright} earnings forecasts , this study shows that firms that beat analysts' revenue forecasts also experience, on average, a decrease in the CDS premium around the earnings announcement date. This study also documents that the effect is stronger when firms beat/miss both earnings and revenue forecasts. When firms beat (miss) earnings and miss (beat) revenues, the effect of earnings is the dominant signal. These effects are stronger for firms with high levels of default risk. ",

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AB - This study explores the impact of beating analysts' forecasts on investors' perceptions about firms' default probability. The information contained in analysts’ forecasts, both earnings and revenues, provides additional information to investors in pricing CDSs. While previous research has focused on the impact of beating analysts’ earnings forecasts , this study shows that firms that beat analysts' revenue forecasts also experience, on average, a decrease in the CDS premium around the earnings announcement date. This study also documents that the effect is stronger when firms beat/miss both earnings and revenue forecasts. When firms beat (miss) earnings and miss (beat) revenues, the effect of earnings is the dominant signal. These effects are stronger for firms with high levels of default risk.

KW - analysts forecasts

KW - cost of debt

KW - default risk

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DO - 10.1016/j.jcae.2018.02.005

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JO - Journal of Contemporary Accounting & Economics

JF - Journal of Contemporary Accounting & Economics

IS - 1

ER -

Beating market expectations and the pricing of firms' probablity of defaulty

Abstract

Keywords

Disciplines

Access to Document

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