Equity Analysts’ Earnings Forecasts and Information Asymmetry in Private Lending

51 Pages Posted: 28 Nov 2013 Last revised: 15 Mar 2016

See all articles by Joshua G. Coyne

Joshua G. Coyne

University of Memphis - School of Accountancy

Derrald Stice

University of Hong Kong - Faculty of Business and Economics; HKU - Accounting Area - Faculty of Business and Economics

Date Written: March 11, 2016

Abstract

We provide evidence of a non-intuitive link between equity analysts and bank loans. We hypothesize and find that the precision of the private information in sell-side equity analysts’ earnings forecasts is associated with price and non-price characteristics of private debt. Using a measure of the precision of analysts’ private information following Barron et al. (1998) for a sample of loans issued to US firms between 1994 and 2012, we find that higher precision is associated with lower interest rates and a lower likelihood of requiring collateral, especially when the borrower has low accounting or credit quality. We isolate the two sources of analysts’ private information (i.e., information-processing ability and information directly from management) and find that both are associated with preferable loan terms. We investigate the effects of one regulatory shock (i.e., Regulation Fair Disclosure) and one economic shock (i.e., the recent financial crisis). After Reg FD, the association between the precision of analysts’ private information and loan terms declines, and during the financial crisis, analysts’ precision is no longer associated with loan terms. Overall, our empirical results suggest that analysts’ forecasts are useful to private lenders when designing debt contracts.

Keywords: equity analysts, earnings forecasts, bank loans, information precision

JEL Classification: M41, G21

Suggested Citation

Coyne, Joshua G. and Stice, Derrald, Equity Analysts’ Earnings Forecasts and Information Asymmetry in Private Lending (March 11, 2016). Available at SSRN: https://ssrn.com/abstract=2360808 or http://dx.doi.org/10.2139/ssrn.2360808

Joshua G. Coyne (Contact Author)

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States

Derrald Stice

University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong, HK
China

HKU - Accounting Area - Faculty of Business and Economics ( email )

Hong Kong

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