Is Analyst Coverage Valuable in the Syndicated Loan Market? Evidence from a Natural Experiment

Abstract

In this study, I exploit an exogenous decrease in analyst coverage to investigate whether analyst coverage terminations have causal effects on the syndicated loan market. My principal results show that a decrease in the number of analysts following a firm increases the all-in-drawn spread of private loans by 14.2 basis points. I then show that the effects are larger for samples that have a larger percentage decrease in analyst estimates, a larger standard deviation of analyst estimates, more non-EPS analyst estimates, a higher leverage ratio or a credit rating lower than A. In addition, I also find that coverage terminations decrease the number of syndicated loans that treated firms can get, shorten the syndicated loan maturity period and decrease the likelihood of less-informed lenders being the lead arranger. These results indicate that public information still matters for syndicated lenders, even though they can acquire private information through other channels. Potential mechanisms might be that analyst reports provide extra information; analysts help lenders to monitor borrowers; and analyst coverage affects the private loan market through the public bond market since private loans and public bonds are partial substitutes. This paper contributes to the literature first by documenting a new factor, analyst coverage, that has an impact on the syndicated loan market; this helps us understand the price, structure and characteristics of lenders in that market. From another angle, this paper also demonstrates the importance of analyst coverage from a new perspective. Second, I examine causal effects by exploiting a natural experiment.