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An International Meeting of American Accounting
Association
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Analyst Following and Cost of Debt |
Mei Cheng
University of Southern California
K. R. Subramanyam
University of Southern California
Abstract: This paper examines the relation between financial (equity) analyst following and cost of debt. We hypothesize that analyst following reduces cost of debt because of the monitoring and the informational roles of the financial analysts. Using a large sample of firms, we find consistent evidence: analyst following is negatively related to default risk which we proxy through issuer credit ratings. The effect of analyst following on cost of debt is less pronounced for firms with superior information environment and stronger controls. Our results are robust to controlling for several factors including the endogenous relation between cost of debt and analyst following. Our study documents important spillover effects of financial (equity) analysts to the debt market.