Equity Analysts' Earnings Forecasts and Information Asymmetry in Private Lending

In this study I 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 1993 and 2012, I find that higher precision is associated with lower interest rates and a lower likelihood of collateralization, especially when credit rating and accruals quality are low. I isolate the two sources of analysts' private information (i.e., information-processing ability and information from management) and find that both are associated with preferable loan terms. I investigate the impact 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 precision of analysts' private information and loan terms declines while the association between quality of information from management and loan terms increases. During the financial crisis, analysts' precision ceases to be correlated with loan terms, while the importance of information from management again increases. Overall, I conclude that analysts' forecasts provide a useful input for decreasing information risk in private loans.