Equity Analystss Earnings Forecasts and Information Asymmetry in Private Lending

Abstract

We provide evidence of a non-intuitive link between equity analysts and bank loans. We hypothesize and find that the precision of the private information in sell-side equity analysts’ earnings forecasts is associated with price and non-price characteristics of private debt. Using a measure of the precision of analysts’ private information following Barron et al. (1998) for a sample of loans issued to US firms between 1994 and 2012, we find that higher precision is associated with lower interest rates and a lower likelihood of requiring collateral, especially when the borrower has low accounting or credit quality. We isolate the two sources of analysts’ private information (i.e., information-processing ability and information directly from management) and find that both are associated with preferable loan terms. We investigate the effects of one regulatory shock (i.e., Regulation Fair Disclosure) and one economic shock (i.e., the recent financial crisis). After Reg FD, the association between the precision of analysts’ private information and loan terms declines, and during the financial crisis, analysts’ precision is no longer associated with loan terms. Overall, our empirical results suggest that analysts’ forecasts are useful to private lenders when designing debt contracts.