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Analyst coverage, syndicate structure, and loan contracts

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Abstract

This paper examines the effect of information intermediaries, specifically financial analysts, on the non-price terms and syndicate structure of bank loans. We find that loans to firms with higher analyst coverage have significantly less intensive covenant restrictions, a lower likelihood of requiring collateral and a lower likelihood of having performance-pricing provisions. Furthermore, our results document a negative relation between analyst coverage and loan maturity, implying that banks become more information-sensitive when lending to firms with large analyst coverage. We also find evidence that lenders tend to form less concentrated syndicate when the number of analysts increases.

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Notes

  1. For example, in 2006, nonfinancial US firms obtained over $1.3 trillion in new loans, which was almost equivalent to the total sum of capital issued in the equity market (around $0.13 trillion) and the bond market (around $1.2 trillion). The data supporting these statistics comes from the Federal Reserve's flow of funds data. http://www.federalreserve.gov/econresdata/releases/corpsecure/current.htm.

  2. To mitigate the information problem, banks must invest in costly information production and due diligence to assess the creditworthiness of the borrower at the outset of a lending relationship, and then monitor the borrower after the loan is made.

  3. Although it is not the exact equivalent of Tobin’s q, it has become common practice in the finance literature to calculate the ratio by using the market value of firm’s equity scaled by its book value of equity (i.e., Market-to-Book).

  4. It is highly possible that a borrower that violated a covenant and failed the renegotiation has no immediate access to other capital.

  5. In Flannery’s model, if transaction costs are high enough, firms with high risk ratings are willing to pay high interest rates on long-maturity debt in order to avoid transactions costs and a high possibility of paying higher rates after rolling over short-term debt; firms with low risk ratings are willing to pay low interest rates on short-maturity debt and roll it over because they are less likely to pay higher interest rates in the next period.

  6. Interacting analyst coverage variable with the dummies of asset tercile is equivalent to running regressions for each of the size tercile.

  7. Because the value of collateral is sensitive to borrower’s action, banks have to closely monitor the borrower after requiring collateral.

  8. In the reported results, we treat the loans with missing collateral information in DealScan as unsecured. Our results are unaffected if we ran the regressions only based on the subset of sample with nonmissing collateral.

  9. Sufi (2007) defined private and unrated firms as opaque firms and firms with investment-grade ratings as transparent firms. In our sample, private firms are not included after combining I/B/E/S, Compustat, and DealScan. We also classified only the unrated firms as opaque; the results were even stronger.

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  1. College of Business, Bowling Green State University, 214 Business Administration, Bowling Green, OH, 43403, USA

    LiuLing Liu

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Liu, L. Analyst coverage, syndicate structure, and loan contracts. Eurasian Econ Rev 5, 1–21 (2015). https://doi.org/10.1007/s40822-015-0015-8

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