The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage

We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference‐in‐differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst.     

Being private,Big 4 auditors,and debt raising

This study investigates the role of auditor choice (Big 4/Non-Big 4) in debt financing for private and public firms. We find private firms have less access to debt than public firms, and Big 4 auditors support debt raising in both private and public firms. Consistent with private firms facing greater information asymmetry, Big 4 auditors are more important for debt raising in private firms than in public firms. The benefit of appointing Big 4 auditors for private firms' debt raising is greater in the opaque information environment of the global financial crisis. It is also greater when firms are smaller, younger, or have poorer financial reporting quality. We also find evidence consistent with Big 4 auditors mitigating agency conflicts and enhancing debt raising when ownership concentration is higher in private firms.     

Analyst forecast characteristics and the cost of debt

We examine the relation between analyst forecast characteristics and the cost of debt financing. Consistent with the view that the information contained in analysts’ forecasts is economically significant across asset classes, we find that analyst activity reduces bond yield spreads. We also find that the economic impact of analysts is most pronounced when uncertainty about firm value is highest (that is, when firms have high idiosyncratic risk). Our findings are robust to controls for private information in equity prices and level of corporate disclosures. Overall, the results indicate that the information contained in analyst forecasts is valued outside the equity market and provide an additional channel in which better information is associated with a lower cost of capital.     

Information Asymmetry and Valuation Effects of Debt Financing

This study demonstrates that under conditions of information asymmetry, shareholders earn positive returns around the shelf registration date of straight debt. The results provide evidence to support Miller and Rock's conclusion that new expected financing by firms can result in positive returns to shareholders and Blazenko's contention that positive returns around the announcement date of straight debt issuance may be found by studying firms with asymmetric information. Firms with reported research and development expenses are assumed to have a higher level of asymmetric information and a greater chance of requiring new outside financing. Research and development expense intensity and abnormal earnings in future periods are found to be significant in a cross-sectional regression explaining abnormal returns for days surrounding the announcement period.     

Cross-listing effect on information environment of foreign firms: ADR type and country characteristics

We examine sources of improvement in the information environment of foreign firms that cross-listed in the United States as American Depositary Receipts (ADRs) between 1995 and 2005. We analyze changes in the number and dispersion of analyst recommendations on foreign firms following their cross-listing. We find increases in analyst coverage intensity across all four types of ADR programs, especially among firms that were listed on organized exchanges (the listing effect), and those that adopted capital raising ADR programs (the financing effect). Our results suggest that the listing effect is more persistent than the financing effect. On the other hand, reductions in recommendation dispersion are observed mainly for firms that choose non-capital raising ADRs and those from emerging markets. Overall, improvements in information environment are more profound among foreign firms originating from countries with greater information asymmetry, namely, countries with weaker legal tradition and rule of law, and countries that are less familiar to U.S. investors.     

The impact of assets-in-place on corporate financing and investment decisions

In a dynamic setting with asymmetric information we consider firms’ debt-equity choice and investment timing. We extend recent research by adding an abandonment option and assets-in-place and we show that these extensions make debt more attractive. This implies, e.g., that mature firms (with larger assets-in-place) mainly use debt financing, whereas young high-growth firms (without assets-in-place) frequently use equity financing and signal their type by early investment. Simulation analyses confirm this and our model is thus able to explain empirical patterns which contradict the static pecking order theory.     

Signing auditors' cultural background and debt financing costs

This study explores the effect of signing auditors' cultural background on debt financing costs. Using a sample of Chinese listed firms from 2007 to 2019, we find a negative association between signing auditors of Confucian origin and the cost of debt, indicating that signing auditors who grow up in strong Confucian atmospheres increase perceptions of audit quality. Furthermore, empirical results show that signing auditors of Confucian origin enhance accounting information quality. Meanwhile, these signing auditors can obtain high audit fees, attract more clients, and are more likely to be selected by client firms when changing auditors. Additional tests document that signing auditors' gender, education level, and working experience attenuate the negative relationships between signing auditors' Confucian background and debt financing costs. The negative effect of signing auditors' cultural background on debt financing costs is more pronounced in non-state-owned firms and firms with less analyst coverage. This paper extends the literature about the influencing factors of financing costs and provides insights into the economic consequence of culture.     

Finding diamonds in the rough: Analysts’ selective following of loss‐reporting firms

Investors face greater difficulty valuing loss‐reporting than profit‐reporting firms: losses may be due to very different reasons (e.g., poor operating performance or investments in intangibles, and financial accounting information is of more limited use for valuing loss‐making firms than profit‐making firms. Because of increased uncertainty about loss firms’ future financial and business viability, we hypothesize that financial analysts will be more selective when choosing to follow loss firms than profit firms, with the result that “abnormal” analyst following will be more informative to investors regarding the future performance of loss firms than profit firms. Consistent with this prediction, we find that abnormal analyst coverage is useful for predicting firms’ future prospects, and is more strongly associated with future performance (stock returns and ROA) for loss firms than for profit firms. The market, however, does not seem to use this useful information when pricing loss firms: for loss firms a portfolio investment strategy based upon abnormal analyst following can generate positive excess returns over 1‐ to 3‐year holding periods. These results are stronger for persistent‐loss firms than for occasional‐loss firms. We conclude that abnormal analyst following contains useful information about firms’ future prospects, and even more so for loss firms than for profit firms.     

Disclosure and the cost of equity in international cross-listing

In this paper, we examine the relationship between disclosure level and the cost of equity capital for a sample of international firms cross-listing on the New York Stock Exchange. Increased disclosure has the potential to reduce information asymmetry, reduce the cost of financing and increase analyst following. Using an international asset pricing model, we find that listing firms experience a decrease in both disclosure risk and systematic risk while matching firms do not. Further, we find that the magnitude of the decrease is related to three types of disclosure: accounting standards; analyst following; and exchange/regulatory investor protection. Our results suggest that increased disclosure through accounting standards is beneficial to investors and that disclosure can be accomplished through information intermediaries, e.g., analyst following. For firms with the lowest levels of disclosure prior to cross-listing, all three types of disclosure appear to be valuable.

Financial statement comparability,state ownership,and the cost of debt: Evidence from China

This study examines whether financial statement comparability (comparability) reduces credit risk and lowers the cost of debt. We hypothesize and document that higher comparability reduces information asymmetry and noise in debt contracting and makes monitoring of managerial activities easier, which reduces the cost of debt. However, the effect of comparability on the cost of debt for state-owned enterprises (SOEs) is insignificant. The results also suggest that competitive pressure and audit quality complement the relationship between comparability and the cost of debt. Our findings remain robust after controlling for endogeneity and in numerous empirical specifications. Overall, our results indicate that greater comparability improves credit decisions of the lenders and also benefits borrowers by reducing the financing cost.     

Who monitors opaque borrowers? Debt specialisation,institutional ownership,and information opacity

In this study, we suggest that the level of information opaqueness determines the propensity of publicly listed firms to have debt financing from only a few debt types (i.e., debt specialisation). Using accruals quality as a proxy for information opaqueness, we find that the degree of debt specialisation is lower for firms with high-quality accruals. This result is consistent with the notion that information collection and monitoring costs are higher for firms that have higher informational opacity, explaining the tendency towards debt specialisation. We further argue that creditors need not monitor borrowers so closely when they are monitored by institutional owners. The empirical findings support this argument and show that firms with more stable institutional ownership are likely to have less specialised debt types. The empirical evidence is also consistent with the expectation that stable institutional ownership is likely to reduce the demand for monitoring over accruals management. Using S&P 500 membership as an exogenous event driving institutional ownership changes, we further document that debt specialisation is decreasing in accruals quality when institutional investors are expected to have an influence.     

Managerial ability and debt maturity

We examine whether and how managerial ability affects corporate debt maturity decisions. The demand for shorter maturity debt is expected to be higher in firms operated by high-ability managers, who possess the superior skills needed to anticipate firms’ economic prospects and communicate their private information, thereby alleviating information asymmetry and bolstering their reputation. We document that firms with high ability managers are associated with more short-term debt financing. The effect becomes stronger for firms facing severe information asymmetry problems, unconstrained firms or high quality firms. Supportive evidence is found from the analysis of short- and long-term debt issuance activity. Our findings remain robust to alternative measures of managerial ability and debt maturity choice, and are not driven by omitted variable bias, endogeneity concerns or industry group. Overall, we provide robust evidence that supports the signalling theory for debt maturity structure and contributes to the literatures on managerial ability.     

Innovation Success and Capital Structure

This paper analyzes the relationship between firms’ innovation success and their capital structures. I hypothesize that firms’ innovation success reduces the extent of information asymmetry facing them in the equity market, leading to a greater propensity of firms to issue equity rather than debt to raise external financing. Supporting these hypotheses, I show empirically that firms with higher levels of innovation success have lower leverage ratios and a greater propensity to issue equity rather than debt. Further, these firms face a lower extent of information asymmetry in the equity market. I establish causality using instrumental variable analyses, instrumenting for patent grants with patent examiner leniency.     

External financing and earnings management: Evidence from international data

Corporate financing conditions in the external capital market are significantly affected by information asymmetry, while internal financing is not. Given that earnings information influences market perceptions regarding firms’ quality, firms relying on external financing should have incentives to manage earnings to improve their financing conditions. This study investigates the effect of corporate external financing behavior on earnings management. Using a sample comprising 75,790 observations of 12,874 firms in 43 countries, we find that accrual-based and real earnings management are positively associated with firms’ reliance on external financing. This positive relationship holds especially true for firms that rely on equity rather than debt financing. We argue that reliance on external financing (especially equity financing), which is subject to problems arising from information asymmetry, generates a motive for earnings management.     

Investment financing: evidence from Korea

This study examines the relative importance of various forms of capital in financing investments by Korean firms. Our results from the seemingly unrelated regression (SUR) method indicate that, unlike U.S. firms, Korean firms rely substantially on cash holdings to finance investments. These results also suggest that Korean firms use long‐term debt more actively than equity issuance to finance investments. Subgroup analyses show that large firms and Chaebol‐affiliated firms use more long‐term debt but less equity issuance than comparison firms do, suggesting that debt capacity allows firms to reduce the use of equity issuance. However, there is little evidence that financing decisions are driven by information asymmetry. The results from the quantile regression (QR) method suggest that Korean firms tend to use debt capital more than they do equity capital at low and medium levels of investments, while their reliance on equity capital increases at high levels of investments.     

Do Banks Provide Financial Slack?

We study the decision to choose bank debt rather than public securities in a firm's marginal financing choice. Using a sample of 500 firms over the 1980 to 1993 time period, we find that firms are relatively more likely to choose bank loans when variables that measure asymmetric information problems are elevated. The sensitivity of the likelihood of choosing bank debt to information problems is greater for firms with no public debt outstanding. These results are consistent with the hypothesis that banks help alleviate asymmetric information problems and that firms weigh these information benefits against a wide range of contracting costs when choosing bank financing.     

Does a change in the information environment affect labor adjustment costs?

We consider how a firm's information environment impacts an index of three proxies for the costs it incurs when adjusting its workforce. We show firms with less information asymmetry have lower labor adjustment costs (LACs). Moreover, this relation is stronger for firms with lower financing constraints and stronger financial performance and growth, which suggests these attributes are particularly appealing to employees. Our difference-in-difference tests based on two exogenous asymmetric information shocks around broker mergers and closures, and decimalization indicate the link is likely causal. Finally, we show that LACs are an important channel through which information asymmetry impacts firm value.     

Some Evidence on the Uniqueness of Initial Public Debt Offerings

Debt initial public offerings (IPOs) represent a major shift in a firm's financing policy by both extending debt maturity and altering the public-private debt mix. In contrast to findings for seasoned debt offerings, we document a significantly negative stock price response to debt IPO announcements. This result is consistent with debt maturity and debt ownership structure theories. The equity wealth effect is negatively related to the offer's maturity, and positively related to the degree of bank monitoring. We find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response.     

产权、所有权安排与融资偏好

成熟市场的企业,由于技术和信息不对称方面的原因,更偏好于债权融资,而不是股权融资.在中国资本市场存在严重信息不对称的情况下,我国企业仍十分偏好于股权融资.这种选择基本上是经营者基于保持控制权的自利性考虑.其根源在于国有产权主体的抽象化、由此导致的失控的所有权安排、股权投资主体控制权的丧失以及债权投资主体拥有的状态依存控制权的威慑.     

Institutional ownership stability and the cost of debt

This study documents that the stability of institutional ownership plays an important role in determining the cost of debt. After controlling for other determinants of the cost of debt, and correcting for the endogeneity of institutional ownership stability, three major results are uncovered. First, there is a robust negative relationship between the cost of debt and institutional ownership stability. Second, institutional ownership stability plays a bigger role in determining the cost of debt, than the institutional ownership level commonly used in the literature. Third, institutional ownership stability affects the cost of debt to a greater extent for firms that are subject to more severe information asymmetry and greater agency costs of debt.