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Information Asymmetry, the Cost of Debt, and Credit Events: Evidence from Quasi-Random Analyst Disappearances

50 Pages Posted: 12 Apr 2012 Last revised: 4 May 2016

François Derrien

HEC Paris - Finance Department

Ambrus Kecskes

York University - Schulich School of Business

Sattar Mansi

Virginia Tech

Date Written: May 3, 2016

Abstract

We hypothesize that greater information asymmetry causes greater 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, and the rate of credit events (e.g., defaults) is roughly 100-150% higher. These results are driven by firms that are more sensitive to changes in information (e.g., less analyst coverage). The evidence is broadly consistent with both financing and monitoring channels, although only a financing channel explains the impact of the loss of an analyst on firms' cost of debt.

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

Suggested Citation

Derrien, François and Kecskes, Ambrus and Mansi, Sattar, Information Asymmetry, the Cost of Debt, and Credit Events: Evidence from Quasi-Random Analyst Disappearances (May 3, 2016). Available at SSRN: https://ssrn.com/abstract=2038896 or http://dx.doi.org/10.2139/ssrn.2038896

François Derrien (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
33 1 39 67 72 98 (Phone)

HOME PAGE: http://www.hec.fr/derrien

Ambrus Kecskes

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Sattar Mansi

Virginia Tech ( email )

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