Firms' Strategic Disclosure of Bad News Around Debt Offerings

This study examines management disclosure behavior around debt offerings and its effect on the cost of debt offered. For the equity market, studies show that management disclosure of good news decreases the cost of equity. Studies also show that debt holders are more concerned with negative earnings and firm credibility. We examine this disclosure tendency of debt holders for debt offerings. We argue that firms use management forecasts of greater than zero earnings before debt offerings, and given this, they strategically tend to use bad news more than good news to increase firm credibility and reduce the cost of the debt issued. We find the results support our argument. We also find that the higher the default risk, the greater the increase in bad news forecasts (with profit) and its reduction effect in the cost of debt