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Does meeting analysts’ forecasts matter in the private loan market?

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  • Chin, Chen-Lung
  • Chen, Mei-Hui
  • Yu, Po-Hsiang

Abstract

Prior studies find that firms meeting or beating analysts’ earnings expectations (MBE) have higher equity valuation and lower bond yield spread. In contract to those studies which focus on public financial markets, this paper explores a firm’s MBE effect on its private loan terms, including price and non-price terms. We find that, despite the fact that banks possess superior information access and processing abilities that reduce information asymmetry costs for borrowers, they still impose more favorable price (i.e., lower loan spread) and non-price (longer loan maturity) terms for firms meeting expectations than for firms missing expectations. In addition, we find that the benefits of meeting expectations (i.e. lower loan spread and longer maturity) are more pronounced for financially distressed firms (habitual beaters) than financially sound firms (sporadic beaters). Further analyses document whether and how prospect theory can be used to explain differential loan terms.

Suggested Citation

  • Chin, Chen-Lung & Chen, Mei-Hui & Yu, Po-Hsiang, 2018. "Does meeting analysts’ forecasts matter in the private loan market?," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 321-340.
    • Handle: RePEc:eee:empfin:v:48:y:2018:i:c:p:321-340
    DOI: 10.1016/j.jempfin.2018.07.005
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    References listed on IDEAS

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    2. Lim, Jesslyn & Do, Viet & Vu, Tram, 2020. "Co-opted directors, covenant intensity, and covenant violations," Journal of Corporate Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Meeting analysts’ earnings expectations; Loan market; Loan spread; Loan maturity;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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