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

Document Type

Article

Publication Date

2-1-2018

Publication Title

Journal of Contemporary Accounting & Economics

First Page

41

Last Page

51

DOI

10.1016/j.jcae.2018.02.005

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.

Notes

Version of record can be found through Elsevier.

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