Derrald Stice

Do banks care about analysts' forecasts when designing loan contracts?

We investigate whether banks rely on the information content in equity analysts’ annual earnings forecasts when assessing the risk of potential borrowers. While a long literature finds that analysts provide useful information to market participants, it is not clear that banks, which have access to privileged information, would benefit from publicly available analysts’ forecasts. If, however, banks do rely on this information, then more precise private information in earnings forecasts may inform banks. We focus our analysis on the requirement of collateral because it is a direct measure of default risk, whereas other loan terms such as interest spread and debt covenants can also protect against other risks, such as asset misappropriation. The direct link between collateral and default risk allows us to examine whether information from analysts is relevant to banks when designing loan contracts. Consistent with our predictions, we find that higher precision of the private information in analysts’ earnings forecasts is associated with a lower likelihood of requiring collateral, and this effect is larger when a borrower does not have a prior relationship with the lender or their accounting or credit quality is low. We also find that this association disappears after the implementation of Regulation FD, consistent with this regulation reducing analysts’ access to private information.

H-1B Visas and Wages in Accounting: Evidence from Deloitte's Payroll

We use payroll data from a Big 4 accounting firm to examine the starting wage differentials for H-1B visa holders. Prior research in other industries has found both positive and negative differentials, but primarily relies on surveyed salary data. We observe that relative to U.S. citizen new hires – matched on office, position, and time of hire – newly hired accountants with H-1B visas receive starting salaries that are lower by approximately 10%. This suggests that, at least in the payroll data we examine, regulatory mandates thought to prevent H-1B visa holders from being paid less than U.S. citizens in similar roles are ineffective. In further tests, we find evidence that the hiring of H-1B visa holders has no or some small positive effect on the wages of peer U.S. citizen new hires (weakly indicative of complementarities or synergies), but no evidence of H-1B hiring driving down the wages for U.S. citizen peer new hires.

Auditor choice and information asymmetry: evidence from international syndicated loans

Analyzing a large sample of non-US public firms from 31 countries that obtain private loans, we find that loan syndicates that lend to borrowers that employ Big N auditors are larger and less concentrated and that the lead arrangers and largest investors of these syndicates are able to hold a lower proportion of the loan after issuance. Further analysis demonstrates that this effect exists only in countries with strong creditor rights and in those countries with high levels of societal trust, suggesting that both sound formal and informal institutional factors are prerequisites for lenders and borrowers to benefit from differential audit quality on loan syndicate structure efficiency. Furthermore, we find that the loan syndicate structure benefits for borrowers that employ Big N auditors are higher for borrowers with greater information asymmetry problems, but we do not find that Big N audits are able to address the information asymmetry and moral hazard issues between the lenders themselves.

The Power of Numbers: Base-Ten Threshold Effects in Reported Revenue

We provide evidence that managers have a revealed preference for reporting total revenue numbers just above base-ten thresholds (i.e., “round” numbers) of the form N × 10K. Examples are

U.S. Worldwide Taxation Policy and Bank Loan Contracting

10 million (1 × 107) and

Equity Analysts’ Earnings Forecasts and Information Asymmetry in Private Lending

4 billion (4 × 109). Our finding is consistent with a literature in psychology demonstrating that humans are susceptible to a cognitive bias associated with base-ten reference points. However, we also document several rational explanations for this revenue management behavior on the part of managers. First, analyst revenue forecasts also exhibit this regularity, especially in early forecasts when greater uncertainty can potentially induce analysts to rely to a greater extent on heuristics, suggesting that managers may be managing reported revenue numbers to meet externally-determined base-ten-influenced benchmarks. In addition, the effect that we document is stronger for firms that face greater pressure to report high revenue growth, while firms that exceed base-ten revenue thresholds for the first time benefit from increased press coverage. Finally, we show that the revenue growth needed to stretch for a base-ten threshold is not sustainable; firms that just exceed base-ten thresholds have lower subsequent revenue growth. Given that managers engage in extra, and, on average, unsustainable efforts to increase revenues to reach base-ten thresholds, our results suggest that revenue manipulation is even more pervasive than previously documented and that lenders, investors, auditors, and regulators should apply an extra degree of skepticism when a reported revenue number just exceeds a base-ten threshold.

The information role of audit opinions in debt contracting

Unlike purely domestic firms, globalized firms have unique opportunities to engage in international tax planning activities. This study examines whether banks consider international tax planning, and in particular potential earnings repatriation taxes, when setting loan contracts for multinational firms. We find that U.S. multinationals with high levels of potential earnings repatriation taxes face higher loan spreads, and we find that this effect is more pronounced for firms that have low profitability or that are financially constrained. We also document that banks are more likely to require collateral and include more financial covenants in the contracts of these borrowers. Our study contributes to the literature by investigating the effect of international tax issues on bank lending.

Qualified Audit Opinions and Debt Contracting

We provide evidence of a non-intuitive link between equity analysts and bank loans. We 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 1994 and 2012, we find that higher precision is associated with lower interest rates and a lower likelihood of requiring collateral, especially when the borrower has low accounting or credit quality. We isolate the two sources of analysts’ private information (i.e., information-processing ability and information directly from management) and find that both are associated with preferable loan terms. We investigate the effects 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 the precision of analysts’ private information and loan terms declines, and during the financial crisis, analysts’ precision is no longer associated with loan terms. Overall, our empirical results suggest that analysts’ forecasts are useful to private lenders when designing debt contracts.