“Do Management Earnings Forecasts Matter in Private Loan Markets?” – by Prof. Jenny Tucker
Fisher School of Accounting
Warrington College of Business Administration
University of Florida
Management earnings forecasts (MEFs) may enhance the credibility of private information communicated to lenders and therefore reduce information risk. We refer to this role as the confirmation role of MEFs and hypothesize that the occurrence, frequency, and precision of MEFs are negatively associated with the interest spreads of subsequently originated loans. We find evidence consistent with this hypothesis. The associations are stronger for firms whose recent MEFs are more credible, for firms with higher financial distress risk, and for loans issued in periods of greater economic uncertainty. In addition, we find that the occurrence, frequency, and precision of MEFs are associated with a smaller proportion of lead-arranger holding and a loan amount more spread out among participating lenders, suggesting reduced information asymmetry among lenders. Our study provides new insight into the role of a common type of forward-looking corporate disclosure in private loan markets.