An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jeff Jiewei Yu
Ohio State University

Abstract: This paper tests whether banks know more about borrowers’ prospects than external investors and find more direct evidence consistent with this superior information hypothesis. The results suggest that at loan initiation banks have already “priced-in” future earnings relevant information about borrowers that is unexpected by sell-side analysts. I also find: (1) Loan spreads are significantly more sensitive to ex post negative earnings shocks than positive ones; (2) The sensitivity of loan spreads to unexpected earnings is reduced for syndicated loans as well as borrowers with high analyst following, and is enhanced after Regulation FD, when the private communication between managers and analysts is prohibited; and (3) the results above become weaker if regressing loan spreads on unexpected earnings one quarter forward, and the results disappear two quarters forward, when uncertainty gradually resolves and most private information at loan initiation has been revealed to the public.

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