Information Asymmetry, the Cost of Debt, and Credit Events: Evidence from Quasi-Random Analyst Disappearances
HEC Paris - Finance Department
York University - Schulich School of Business
Virginia Polytechnic Institute & State University
September 12, 2014
We hypothesize that an increase in information asymmetry causes an increase in both expected and actual losses to debtholders. To test this, we identify exogenous increases in information asymmetry using the loss of an analyst that results from broker closures and broker mergers. We find that the loss of an analyst causes the cost of debt to increase by 25 basis points for treatment firms compared to control firms. Moreover, the rate of credit events (such as defaults) is roughly 100-150% higher than for similar firms that do not lose an analyst. These results are significantly stronger for firms for which the increase in information asymmetry is more costly on the margin, including firms that are smaller, have less analyst coverage, have higher leverage, have a lower credit rating, and have shorter debt maturity.
Number of Pages in PDF File: 43
Keywords: Information asymmetry; Cost of debt; Default; Bankruptcy; Natural experiment; Matching estimators; Difference-in-differences; Equity research analysts; Creditors
JEL Classification: D80, G12, G24, G33
Date posted: April 12, 2012 ; Last revised: September 13, 2014
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