Title:Does management earning news matter to private loan markets?

Speaker:Jennifer Wu Tucker (University of Florida)

Time:June 21, 2018, 14:30

Location:Room 429, Main Building

Introduction:

　　Most prior research examines the information role of management earnings forecast (MEF) in equity markets. We investigate the confirmation role of MEF in private loan markets and hypothesize that MEF may enhance the credibility of private information communicated to lenders and therefore reduce loan spreads. Consistent with this hypothesis, we find negative associations between the occurrence, frequency, and precision of MEF and the spreads of subsequently originated loans. The economic effect is significant: among firms that provide an MEF at some point during our sample period, those issuing an MEF in the six months preceding a new loan experience a loan spread 19 basis points lower than those not issuing an MEF (about $0.88 million in annual interest savings). These associations are stronger for firms with recent restatements or in periods of greater economic uncertainty, and are weaker for firms with relationship lending. These results indicate that the effects of MEF are more pronounced when the confirmation role of MEF is in greater demand. We also find that managers increase the frequency and precision of MEF in anticipation of new loans. Overall, we provide indirect evidence of the confirmation role of MEF in private loan markets.