Does Meeting Analyst Forecasts Matter in Private Loan Market?

Abstract

The paper examines syndicated loan market to study whether and how borrowers’ meeting or beating analysts’ expectations (MBE) have more favorable debt contractual terms. Using a sample of listed loan firms in Dealscan database during 1998-2009, we find that, as predicted, firms missing analysts’ earnings forecasts have higher loan spreads, relative to those meeting analysts’ expectations. In addition to price loan term (e.g., interest spread), we further find that missing earnings expectations has an adverse effect on non-price loan terms. Specifically, we find that when firm misses its earnings expectations, lenders are more likely to require a borrower to provide collateral to compensate for missing earnings expectations; lenders also impose more covenants on firms missing expectations, regardless of financial or general covenants. However, further analyses provide no evidence that the proportion of the loan retained by syndicate lead arrangers has an association with whether a borrower meets expectations. By providing evidence that a firm’s missing expectation influence the lenders’ reliance on non-price loan terms, this paper documents the importance of financial reporting disclosure in shaping non-price debt contractual terms.

Keywords: meeting/missing expectations, syndicated loan market, debt contractual terms