The Positive Externality Effect of Analyst Coverage on the Private Loan Market

38 Pages Posted: 13 Dec 2006

Date Written: November 27, 2006

Abstract

Both the quantity and the quality of analyst coverage are associated with lower spreads on private loans, and the impact is stronger for firms with higher holdings of intangible assets. This supports the argument that analyst coverage can reduce both the information risk and the agency risk facing all external investors, including creditors in general and private lenders in particular. When more analysts cover a firm and when analysts have better-quality information, the firm's perceived risk level is lower; meanwhile, due to information acquired and processed by financial analysts, banks incur lower information-search costs. Consequently private lenders are willing to charge lower interest rates. The analyses indicate that financial analysts and banks, the two major financial intermediaries, are complements to, rather than substitutes for, each other.

Keywords: Analyst Coverage, Loan Pricing, Information Problem, Agency Problem

JEL Classification: G21, G30

Suggested Citation

Yuan, Lianzeng Edward, The Positive Externality Effect of Analyst Coverage on the Private Loan Market (November 27, 2006). Available at SSRN: https://ssrn.com/abstract=951035 or http://dx.doi.org/10.2139/ssrn.951035

Lianzeng Edward Yuan (Contact Author)

Cornerstone Research ( email )

599 Lexington Avenue
New York, NY 10022
United States

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