Private Lenders’ Use of Analyst Earnings Forecasts When Establishing Debt Covenant Thresholds

The Accounting Review, forthcoming

45 Pages Posted: 13 Feb 2018 Last revised: 9 Aug 2021

See all articles by Andrew C. Call

Andrew C. Call

Arizona State University (ASU) - School of Accountancy

John Donovan

University of Notre Dame - Department of Accountancy

Jared N. Jennings

Washington University in St. Louis

Date Written: August 1, 2021

Abstract

We examine whether lenders use analyst forecasts of the borrower’s earnings as inputs when establishing covenant thresholds in private debt contracts. We find that, among debt contracts that include an earnings covenant, earnings thresholds are set closer to analyst forecasts when analysts have historically issued more accurate earnings forecasts. These results are robust to firm fixed effects and an instrumental variable approach. Further, we find that, following a plausibly exogenous decline in the availability of analyst earnings forecasts, debt contracts are less likely to include earnings covenants. Our evidence is consistent with lenders using analyst earnings forecasts as an input when establishing debt covenant thresholds and suggests sell-side analysts play a role in debt contracting.

Keywords: Analysts, earnings forecasts, debt covenants

JEL Classification: M40, M41, G20, G21

Suggested Citation

Call, Andrew C. and Donovan, John and Jennings, Jared N., Private Lenders’ Use of Analyst Earnings Forecasts When Establishing Debt Covenant Thresholds (August 1, 2021). The Accounting Review, forthcoming , Available at SSRN: https://ssrn.com/abstract=3119889 or http://dx.doi.org/10.2139/ssrn.3119889

Andrew C. Call (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

John Donovan

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jared N. Jennings

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

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