Bank-Firm Relationhips and Security Analyst Activities: Evidence from Japan

Abstract

Banks play a critical role in corporate governance in many economies around the world. This paper empirically compares the activities of security analysts (i.e., analyst coverage, forecast accuracy and forecast agreement) between firms with and without close working relationships with their banks in order to gain insights into how bank-firm relationships affect the information environments for capital market investors. With close bank-firm relationships, capital market investors should demand less information because they can rely on the banks' monitoring. Thus, the firms should publicly disclose less. Similarly, security analysts should make less effort in analyzing these firms. Investigating Japanese firms, we document that security analysts' forecasts are less accurate and less agreed (i.e., more dispersed) for the firms with long-established relationships with banks. Likewise, analyst coverage, forecast accuracy and forecast agreement are all lower for the firms with a larger amount of loans (i.e., private debt). The associations between bank-firm relationships and security analyst activities hold even after controlling for the firms' capital market financing, indicating that the banks' monitoring plays a role in the associations.