Private lenders' use of analyst earnings forecasts when establishing debt covenant thresholds

This article examines the use of annual earnings guidance as a mechanism used by managers to reduce the volatility of analyst earnings forecasts and allow them to report smooth earnings without missing quarterly analyst forecasts. Facing the pressure to meet or beat analyst forecasts and driven by the perceived capital market benefits of reporting a smooth earnings path, managers attempting to influence investors’ earnings expectations over a longer horizon can issue annual guidance to smooth the time-series path of analyst forecasts, a strategy we term as “expectation smoothing.” Our empirical results suggest that annual guidance reduces the volatility of analysts’ multi-period forecasts, which in turn contributes to a smoother actual earnings and higher likelihood of meeting analysts’ quarterly forecasts. We also find that issuing quarterly guidance does not affect the smoothness of analysts’ earnings expectations and that managers with longer horizons are more likely to issue annual guidance, consistent with the unique long-term effects of annual earnings guidance.

SYNOPSIS Beginning January 1, 2012, all publicly listed firms in China are required, under the Basic Standard of Enterprise Internal Control (China SOX), to provide an internal control report (ICR). Prior to that, many firms had elected to voluntarily comply with this regulation. We examine the change in internal control disclosure regimes and its impact on the properties of analyst earnings forecasts. We compare the quantity and severity of ICWs disclosed under voluntary versus mandatory regimes, and find evidence suggesting that the disclosure of more serious ICWs increases when ICW disclosures become mandatory. We then investigate the effect of ICW disclosures on analyst forecast error and dispersion. We find that measures of ICWs are negatively associated with desirable properties of analyst earnings forecasts. We also find a less positive association between ICW disclosures and forecast error and dispersion in the mandatory regime. JEL Classifications: G34; G38; M41.

ABSTRACT This paper empirically examines the association between bank capital and banks' monitoring effort. We use four proxies to measure the unobservable monitoring effort. Two of the proxies are based on loan quality (ex post outcomes of monitoring effort). The other two proxies are based on salary expense (ex ante proxies intended to capture the quality and quantity of labor input into monitoring effort). Using a bank and time fixed effects estimation, we find a positive association between bank capital and each of our measures of monitoring effort. We find that this association is more pronounced for smaller banks and banks that engage in higher levels of relationship lending. Numerous additional tests and robustness checks, including matched sample analysis and instrumental variable approach to address endogeneity, confirm our main findings. Overall, our evidence is consistent with the prediction in Mehran and Thakor (2011) that banks that keep higher capital monitor more. JEL Classifications: G21; G32; M41.

Purpose The purpose of this paper is to contribute to the literature on microcredit impacts by quantifying the gender disaggregated effects of long-term borrowing on capital accumulation in order to address the existing gap. Separate models are estimated for male-headed and female-headed households to determine if the effects of microcredit differ between these gender types. Design/methodology/approach The paper adopts the method proposed by Deaton (1990) in which he specifies a model without borrowing restrictions whereby the household maximizes an inter-temporal utility function. To account for self-selection and endogeneity of micro credit, the fixed effects instrumental variable approach is used. Data are disaggregated by gender and analyzed separately. Findings The paper finds that micro credit indeed increases productive assets and human capital but has no significant effect on non-productive assets. One striking result is that after disaggregating the data by gender, the authors find no effect of micro credit on women-headed households. Practical implications The paper provides an empirical evidence for the need to address gender issues in finance and lending. Furthermore, targeted lending particularly to women makes a great difference in the fight against poverty. Originality/value This paper fills the gap on gender and micro credit impacts on capital accumulation in a developing country context.

We study the role of borrower accounting quality in debt contracting. Specifically, we examine how accounting quality affects the borrower's choice of private versus public debt market and how the design of debt contracts vary with accounting quality in the two markets. We find that accounting quality affects the choice of the market, with poorer accounting quality borrowers preferring private debt, i.e., bank loans. This is consistent with banks possessing superior information access and processing abilities that reduce adverse selection costs for borrowers. We also find that accounting quality has an economically significant but differential impact on contract design in the two markets consistent with differences in recontracting flexibility across the two markets. In the case of private debt, since there is greater recontracting flexibility, both the price (i.e., interest) and non-price (i.e., maturity and collateral) terms are significantly more stringent for poorer accounting quality borrowers, unlike public debt where only the price terms are more stringent. The impact of accounting quality on interest spreads of public debt is 2.5 times that of the private debt, since the price terms alone reflect the variation in accounting quality.

This dissertation analyzes large-scale panel data on individual satisfaction in three self-contained empirical studies, each taking a different perspective on individual satisfaction and using appropriate econometric methods accordingly. In its first empirical analysis, the thesis addresses the obvious question of satisfaction as an outcome, here if life satisfaction is an outcome of education. Results of the instrumental variable estimation, using German NEPS data, show that education has no effect on life satisfaction, yet on some of its determinants. Based on the idea that income is a fundamental of financial satisfaction, the second analysis concludes from satisfaction to its cause: Intra-household satisfaction differences are used as a means to approach the intra-household income distribution. Panel fixed effects estimations on German SOEP data show that couples share their income according to their individual financial contribution to the household‘s income. Finally, the last analysis, which also uses SOEP data, explores the question whether satisfaction could also be the cause of a typical determinant of itself, i.e. of income. This analysis also uses SOEP data and an recent synthetic instrumental variable approach. Results suggest that satisfaction causes income, while income tends not to cause satisfaction.

The inflow of international remittances to Kerala has been increasing over the last three decades. It has increased the income of recipient households and enabled them to spend more on human capital investment. Using data from the Kerala Migration Survey-2010, this study analyses the impact of remittance receipts on the households’ healthcare expenditure and access to private healthcare in Kerala. This study employs an instrumental variable approach to account for the endogeneity of remittances receipts. The empirical results show that remittance income has a positive and significant impact on households’ healthcare expenditure and access to private healthcare services. After disaggregating the sample into different heterogeneous groups, this study found that remittances have a greater effect on lower-income households and Other Backward Class (OBC) households but not Scheduled Caste (SC) and Scheduled Tribe (ST) households, which remain excluded from reaping the benefit of international migration and remittances.