Debt covenants and analysts’ information environment

Abstract

ABSTRACTThis study investigates whether private information from financial covenants in syndicated loans affects analysts’ information environment. Specifically, we examine the relationship between the number of financial covenants and common information in analysts’ forecasts, defined as the common-to-total information ratio. We demonstrate that the common information in analysts’ forecasts increases significantly after loan initiation when loans impose more financial covenants. We also find that the effect is more pronounced for balance sheet-based covenants relative to income statement-based covenants. Our evidence suggests that analysts use financial covenant information in loan contracts to shape their forecast behavior.