Please join me in congratulating John Donovan and Stephannie Larocque for their recent scholarly achievements:
John’s paper, "Private lenders’ use of analyst earnings forecasts when establishing debt covenant thresholds," coauthored with Jared Jennings (Washington University) and Andy Call (Arizona State University) has been accepted for publication at The Accounting Review. Here is the abstract:
We examine whether lenders use analyst forecasts of the borrowing firm’s earnings when establishing covenant thresholds in private debt contracts. We find greater proximity between the future earnings performance required by the contract and analysts’ consensus earnings forecast among borrowers whose analysts historically issue more accurate earnings forecasts, consistent with our hypothesis that lenders use analyst earnings forecasts when establishing debt covenant thresholds. These results are robust to firm and year fixed effects as well as an instrumental variable approach that addresses potential endogeneity. To corroborate these results, we also find that debt contracts are less likely to include earnings-based covenants following an exogenous decline in analyst coverage. Last, we find that the likelihood that the borrower violates a debt covenant following a decline in creditworthiness is positively associated with the extent to which debt covenant thresholds are set closer to analyst expectations. Our results provide new evidence on the role of sell-side analysts in debt contracting and inform the literature on the information used by lenders when establishing debt covenant thresholds.
Stephannie has two papers recently accepted for publication. The first paper, “Private equity performance and the effects of cash flow timing,” coauthored with our Finance colleague Sophie Shive and our former Accountancy colleague Jennifer Sustersic Stevens (Ohio University), has been accepted for publication at The Journal of Portfolio Management. Here is the abstract:
Private equity firms have discretion over the timing of their funds' capital calls and distributions, making the popular internal rate of return (IRR) an incomplete measure of private equity fund performance. Do investors avoid the textbook pitfalls of the IRR when cash flow timing is partly endogenous? In our comprehensive sample of 6,945 funds, more than half of the funds' IRR is attributable to timing, with substantial variation. The timing component persists across a private equity firm's funds and facilitates fundraising.
Stephannie’s second paper, “Independent and Investment-Bank Analysts’ Target Prices,” coauthored with Kris Allee (University of Arkansas), Devon Erickson (Utah State University), and Adam Esplin (University of Texas at El Paso), has been accepted for publication at the Journal of Financial Reporting. Here is the abstract:
We provide new evidence on individual analysts’ differential abilities to forecast firm value. We find that independent analysts’ target prices perform well in predicting future price relative to investment-bank analysts. Our evidence suggests that, 12 months after their issuance, independent analysts’ target prices are more likely to be met than those issued by investment-bank analysts in general and are more accurate than the target prices of affiliated investment-bank analysts, controlling for analyst characteristics. We also find that independent analysts’ target prices are more likely to be met for firms with higher stock price momentum. In contrast, we find that the association between realized returns and the returns predicted by target prices does not differ for independent vs. investment-bank analysts. Moreover, independent analysts’ target prices are less likely to be met and are less accurate for firms with higher volatility. Our evidence contrasts with prior literature which generally concludes that independent analysts’ research is of lower quality. Yet, the market appears to react relatively less strongly to independent analysts’ target price revisions. Our findings suggest that investors and researchers can benefit from understanding the properties of independent analysts’ target prices, particularly for certain types of firms.
Congratulations John and Stephannie!