Do banks care about analysts' forecasts when designing loan contracts?

Joshua Coyne; Derrald Stice

doi:10.1111/jbfa.12304

journal article Jan 23, 2018

Do banks care about analysts' forecasts when designing loan contracts?

Joshua Coyne Derrald Stice

Journal of Business Finance & Accounting Vol. 45 No. 5-6 pp. 625-650 · Wiley

View at Publisher Save 10.1111/jbfa.12304

Abstract

AbstractWe investigate whether banks rely on the information content in equity analysts’ annual earnings forecasts when assessing the risk of potential borrowers. While a long literature finds that analysts provide useful information to market participants, it is not clear that banks, which have access to privileged information, would benefit from publicly available analysts’ forecasts. If, however, banks do rely on this information, then more precise private information in earnings forecasts may inform banks. We focus our analysis on the requirement of collateral because it is a direct measure of default risk, whereas other loan terms such as interest spread and debt covenants can also protect against other risks, such as asset misappropriation. The direct link between collateral and default risk allows us to examine whether information from analysts is relevant to banks when designing loan contracts. Consistent with our predictions, we find that higher precision of the private information in analysts’ earnings forecasts is associated with a lower likelihood of requiring collateral, and this effect is larger when a borrower does not have a prior relationship with the lender or their accounting or credit quality is low. We also find that this association disappears after the implementation of Regulation FD, consistent with this regulation reducing analysts’ access to private information.

Topics

No keywords indexed for this article. Browse by subject →

References

85

[1]

10.1016/0165-4101(91)90003-7

[2]

10.1016/0165-4101(94)00392-i

[3]

10.1506/car.24.3.1

[4]

10.2308/accr.2002.77.4.867

[5]

10.1016/s0165-1765(03)00032-6

[6]

10.1016/j.jacceco.2016.06.001

[7]

10.1016/j.jacceco.2004.01.004

[8]

Arand D. &Kerl A. G.(2012).Analyst research and investor reactions: Evidence from the 2008 financial crisis. Working Paper (University of Giessen). 10.2139/ssrn.2126605

[9]

10.1016/j.jacceco.2010.10.001

[10]

10.1016/j.jacceco.2004.09.005

[11]

10.1016/0165-4101(94)90031-0

[12]

Barron O. E. "Using analysts' forecasts to measure properties of analysts' information environment" The Accounting Review (1998)

[13]

Relationship Lending and Lines of Credit in Small Firm Finance

Allen N. Berger, Gregory F. Udell

The Journal of Business 10.1086/296668

[14]

10.1093/rfs/hhp064

[15]

Accounting Quality and Debt Contracting

Sreedhar T. Bharath, Jayanthi Sunder, Shyam V. Sunder

The Accounting Review 10.2308/accr.2008.83.1.1

[16]

10.1006/jfin.1995.1014

[17]

10.1023/b:rast.0000028188.71604.0a

[18]

Boyd J. "Financial intermediary‐coalitions" Journal of Financial Theory (1986)

[19]

10.2308/accr.2004.79.1.25

[20]

10.2308/jis.2008.22.2.1

[21]

10.1016/0169-2070(93)90023-g

[22]

10.1016/0165-4101(87)90017-6

[23]

10.1111/j.1540-6261.1978.tb03385.x

[24]

10.1111/1475-679x.12131

[25]

Call A. Donovan J. &Jennings J.(2017).Lenders’ use of analyst earnings forecasts when establishing debt covenant thresholds. Working Paper (Arizona State University). 10.2139/ssrn.3119889

[26]

Carrizosa R. &Ryan S.(2016).Borrower private information covenants and loan contract monitoring and renegotiation. Working Paper (New York University). 10.2139/ssrn.2585245

[27]

10.2307/1992508

[28]

How Does Financing Impact Investment? The Role of Debt Covenants

Sudheer Chava, MICHAEL R. ROBERTS

The Journal of Finance 10.1111/j.1540-6261.2008.01391.x

[29]

The information role of audit opinions in debt contracting

Peter F. Chen, Shaohua He, Zhiming Ma et al.

Journal of Accounting and Economics 10.1016/j.jacceco.2015.04.002

[30]

Price Informativeness and Investment Sensitivity to Stock Price

Qi Chen, Itay Goldstein, Wei Jiang

Review of Financial Studies 10.1093/rfs/hhl024

[31]

10.1016/j.jacceco.2009.12.004

[32]

10.1506/car.25.4.3

[33]

Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?

MICHAEL B. CLEMENT

Journal of Accounting and Economics 10.1016/s0165-4101(99)00013-0

[34]

Daley L. A. "Analysts' forecasts, earnings variability, and option pricing: Empirical evidence" The Accounting Review (1988)

[35]

10.2307/2297430

[36]

10.1086/261775

[37]

10.1016/j.jfi.2014.02.001

[38]

10.1016/0304-3932(85)90051-0

[39]

FASB. (2010).Concepts statement No. 8—Conceptual framework for financial reporting. Norwalk CT: Financial Accounting Standards Board.

[40]

10.1086/258172

[41]

10.1016/s0165-4101(02)00058-7

[42]

10.1016/0165-4101(82)90015-5

[43]

The importance of the internal information environment for tax avoidance

John Gallemore, Eva Labro

Journal of Accounting and Economics 10.1016/j.jacceco.2014.09.005

[44]

Toward an Implied Cost of Capital

William R. Gebhardt, Charles M. C. Lee, Bhaskaran Swaminathan

Journal of Accounting Research 10.1111/1475-679x.00007

[45]

10.1111/j.1475-679x.2009.00336.x

[46]

10.1016/j.jacceco.2003.12.001

[47]

10.1016/0165-4101(79)90006-5

[48]

10.1016/j.jfineco.2007.08.005

[49]

10.1016/j.jfineco.2014.07.003

[50]

10.1111/j.1368-423x.2004.00123.x

Showing 50 of 85 references

Cited By

29

Private Lenders' Use of Analyst Earnings Forecasts When Establishing Debt Covenant Thresholds

ANDREW C. CALL, John B. Donovan · 2021

The Accounting Review

Metrics

29

Citations

85

References

Details

Published: Jan 23, 2018
Vol/Issue: 45(5-6)
Pages: 625-650
License: View

Authors

J

Joshua Coyne

School of Accountancy University of Memphis Memphis TN 38152 USA

D

Derrald Stice

School of Business & Management Hong Kong University of Science & Technology Kowloon Hong Kong

Funding

University of Memphis

Cite This Article

Joshua Coyne, Derrald Stice (2018). Do banks care about analysts' forecasts when designing loan contracts?. Journal of Business Finance & Accounting, 45(5-6), 625-650. https://doi.org/10.1111/jbfa.12304

Do banks care about analysts' forecasts when designing loan contracts?

You May Also Like