Financial Analysts' Career Concerns and the Cost of Private Debt

56 Pages Posted: 3 Jun 2021

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Liuling Liu

Bowling Green State University - College of Business Administration

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance

Yijiang Zhao

American University - Kogod School of Business

Date Written: December 2, 2020

Abstract

Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts’ ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.

Keywords: Analysts’ career concerns, Cost of bank loans, Firm risk, Natural experiment

JEL Classification: G21, G24, G34, M40

Suggested Citation

Francis, Bill and Hasan, Iftekhar and Liu, Liuling and Wu, Qiang and Zhao, Yijiang, Financial Analysts' Career Concerns and the Cost of Private Debt (December 2, 2020). Journal of Corporate Finance, Vol. 67, 2021, Available at SSRN: https://ssrn.com/abstract=3858998

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Liuling Liu

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance ( email )

5182095596 (Phone)
12047-4974 (Fax)

Yijiang Zhao (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States
202-885-1941 (Phone)

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