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Information Risk and the Cost of Debt Capital

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Sattar A. Mansi, William F. Maxwell and Darius P. Miller

We test whether forecast dispersion is related to the uncertainty of economic fundamentals by exploiting the unique attributes of the corporate bond market. We find strong evidence that forecast dispersion is positively priced in corporate bond yields. We also provide evidence that other firm specific information measures, such as the level of idiosyncratic risk, analyst following, forecast bias,
ownership structure, probability of informed trading (PIN), executive compensation, age, size, and accounting disclosures impact the spread on corporate bonds, but do not subsume the effect of dispersion. Our results are consistent with the hypothesis that the dispersion of analysts’ forecasts represents a forward looking measure of information risk that is priced in financial markets.

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