This paper examines whether beating previous year cash flow values and analysts' cash flow forecasts impact the firms' cost of debt. Creditors are expected to be more concerned about firm solvency than firm profitability. Accordingly, if lenders have any reference point it may be related to cash flow numbers. This study finds that firms that beat analysts' cash flow forecasts have smaller initial bond yield spreads in the next period and a decrease in their initial bond yield spreads between consecutive periods. This effect is more pronounced at short maturities and for observations with less informative earnings. Firms with lower earnings response coefficients that beat analysts' cash flow forecasts show a higher probability of a credit rating upgrade.
This is an Accepted Manuscript of an article published by Taylor & Francis in Investment Analysts Journal on 2015-02-18, available online: http://wwww.tandfonline.com/10.1080/10293523.2014.11082573.
Available at: http://works.bepress.com/mauricio-melgarejo/3/