Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
Transcript of Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 1/33
Analysts’ Overoptimism, Bank Loan Announcement, and the
Borrowing Firms’ Long Run Performance
Shao Chi Changa
Ya Shin Chenga
Ming Tse Tsaia
a Department of Business Administration, National Cheng Kung University, Tainan Taiwan
Abstract
In this study, we test analysts’ forecasts for firms announcing bank loans, and the
relationship between these forecasts and the long-run performance of the firms. Banks
have greater access and resources to get more inside information and do monitoring of
the borrowing firms, actions which are costly for common outside investors, and thus a
bank loan agreement conveys the positive perceptions of the lender bank to other
participants in capital market. Analysts have been shown to be over-optimistic with
regard to the equity issuing company, and thus we attempt to test whether they are also
overoptimistic with regard to firms that receive bank loans. The empirical results in our
study show that analysts are over-optimistic about firms that announce bank loans, andthat this might be an explanation for the firms’ long-run underperformance.
Key words: bank loan announcement, analyst overoptimism, long run performance
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 2/33
1
I. Introduction
Bank loans are an important way for firms to raise capital. Billet, Flannery and
Garfinkel (2006) show that the bank loan financing firm have positive returns around
the bank loan announcement, but disappointing long-run stock performance in the
following three years. This return trend is similar to that seen for other announcements
of actions to raise capital. For example, after IPO announcement previous studies show
that on average the issuing firms have positive announcement stock returns over the
short run and relatively poor stock performance in the long run (Ritter 1991). Spiess
and Affleck-Graves (1995) also find the same phenomenon after SEO announcements.
With regard to companies making bank loan announcements, James (1987) and
Lummer and McConnell (1989) provide evidence to show such firms have significantly
positive abnormal returns in the short run, but poor long-run performance.
Ritter (1991) proposes that the difference between the short- and long-run stock
performance after IPO announcements may be due to investors early overoptimism.
However, in the long run, investors revise their expectations for the firms and the stock
price reverses to its true value. Rajan and Servas (1997) adopt the analysts’ forecasts as
a proxy of investors’ expectations to provide a more direct empirical test with regard to
investors’ overoptimism at IPO announcements. They find that analysts tend to be
overoptimistic about the earnings potential and long run growth prospects of recent
IPOs. Analysts’ overoptimism is a good proxy for that of investors, because the
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 3/33
2
opinions of the former tend to reflect or drive the expectations of the latter.
James (1987) examines whether banks delivers valuable information about their
borrowers to investors in the market. The empirical results show that the stock return
trend after bank loan announcements is similar to the stock return trend after IPO
announcements. However, to date there is still no direct evidence to support the
relationship between investors’ overoptimism and bank loan announcements with
regard to the inconsistence in short- and long-run performance of borrower firms. Rajan
and Servas (1997) use analysts’ forecasts to test the investors’ overoptimism with
regard to IPO firms. Consequently, in this study we adopt analysts’ forecasts to test
whether investors’ overoptimism could explain the short run positive and long run poor
stock performance.
Why are analysts over-optimistic with regard to firms announcing bank loans? There
are two hypotheses, as follows. First is the information asymmetry hypothesis (Lummer,
McConnell 1989; Diamond 1984). In this, banks are generally viewed as insiders that
have access to more private information about the borrowing firms. When banks
approve a loan contract, this decision signals the borrowers’ creditworthiness to other
participants in the capital market. Second is the monitoring hypothesis (Fama 1985;
Diamond 1991). In this view, compared to common investors, banks have more
resources and capabilities to supervise the company and prevent the occurrence of
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 4/33
3
moral hazard. In relation to this, banks can also enhance the value of borrowing firms
by efficient monitoring and reducing information asymmetry. James (1987) and
Lummer and McConnell (1989) provide empirical evidence to show that bank loan
agreements convey positive news to the stock market and result in positive
announcement excess returns. These benefits might thus explain the short run
overoptimism and long run reverse that accompanies the announcement of such
financing deals.
In this study, we attempt to test the relationship between bank loan announcements,
analysts’ forecasts, and the borrowers’ stock performance. We address three questions:
(1) Are analysts over-optimistic at bank loan announcements?
(2) Do analysts make systematic errors in forecasting the stock performance of firms
announcing bank loan financing?
(3) Is the long run stock performance of borrowing firms related to the analysts’
overoptimism?
The existing literature has found evidence of analysts’ overoptimism with regard to
the performance of IPO firms, but there is still no clear evidence either for or against
this for bank loan announcements. This study thus intends to fill this gap in the
literature. By observing analysts’ forecasts, we investigate whether investors’
overoptimism is one explanation for the short run positive stock performance and long
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 5/33
4
run underperformance of the firms announcing bank loan financing. There are four
sections in the rest of this paper, section II is the literature review and presents the
hypotheses, section III presents the data and methodology, section IV is the empirical
results, and section V is the conclusion.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 6/33
5
II. Literatures and Hypotheses
In this paper we use analysts’ forecasts as the proxy of the investors’ expectations.
Michaely and Womack (1999) find that analyst specific dissemination tasks include
gathering new information, analyzing data, writing reports and provide
recommendations to buy-side investors. Givoly and Lakonishok (1979), and Fried
and Givoly (1982), Ackert and Athanassakos (2003) propose that analysts’ earnings
forecasts convey useful information to market participants. When the investors have
any doubts about the target firm, they tend to refer to the opinions of analysts.
Therefore, analysts’ forecasts play an important role to guide and even drive investors
to make their investment decisions.
Rajan and Servaes (1997) examine analysts’ forecasts following IPOs, and their
empirical results show that analysts are overoptimistic about both the earnings potential
and the long term growth prospects of IPO firms. They propose that this overoptimism
might result from a selection bias, because analysts have an incentive to follow firms
with better prospects. Dechow, Hutton, and Sloan (2000), and Chahine (2004), also
provide evidence to show that analysts are over-optimistic with regard to firms offering
equity, which stems from the fact that they are generally over-optimistic about raising
capital in equity market. In this study, we want to test whether analysts are also
over-optimistic with regard to bank loan announcement.
Eckbo (1986) shows that issuing debt does not significantly influence the stock price.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 7/33
6
James (1987), Lummer and McConnell (1989), and James (2006) find positive stock
return responses to the announcement of new bank credit agreements which are larger
than the responses associated with announcement of private placements or public
straight debt offerings. There are two hypotheses to support the positive stock return of
borrowing firms after a bank loan announcement. First is the information asymmetry
hypothesis. Diamond (1984), Lummer and McConnell (1989), Best and Zhang (1993)
propose that the banks have more access to information which is not available to other
outside investors. Fama (1985) also claims that banks have intimate and continuing
business relationships with the borrowing firms, and thus have advantages over other
capital market participants with regard to evaluating them. Because banks have more
access to information, if they decide to lend money to a firm then the announcement
also conveys the banks’ positive perceptions to other investors in market. Second is the
monitoring hypothesis. Besanko and Kanatas (1993) develop a model to prove the
special role of bank lending, and show that banks provide monitoring for entrepreneurs.
Such monitoring enhances the entrepreneur effort and improves the odds of success for
any project. Thus, Besanko and Kanatas (1993) claim that if firms’ capital structure
includes more bank loans, then the firms’ stock price should be higher than the
equilibrium stock price because of these bank monitoring effects. Datta, Iskandar-Datta,
and Patel (1999) also propose the banks have lower monitoring costs with regard to
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 8/33
7
supervising borrowers, and that the cross-monitoring brings lower future debt costs.
These earlier studies suggest that the information asymmetry and monitoring
hypotheses both support the idea that bank loan announcements make outside investors
more confident about the borrowing firms’ future prospects. In addition, Zhaoyang and
Jian (2007) propose that analysts tend to overreact to good news, and thus because bank
loan announcements convey positive signals to investors, analysts might be
over-optimistic about such firms. Therefore we expect that analysts will be
over-optimistic following bank loan announcements.
Hypothesis 1: Analysts are over-optimistic when firms make bank loan announcements.
Dechow, Hutton and Sloan (2000) found sell-side analysts’ long-term forecasts are
systematically over-optimistic around equity offerings. Rajan and Servaes (1997) found
analysts systematically overestimate the earnings of IPO firms, with approximately a
five percent forecast error for the stock price. As the forecast window increases, so does
the forecast error. Analysts are not only over-optimistic with regard to equity offerings,
they are also more over-optimistic about the offering firms’ long-run rather than
short-run prospects. The arguments in these earlier studies motivate our second
hypothesis.
Hypothesis 2: Analysts make systematic errors in forecasting the performance of bank
loan financing firms.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 9/33
8
Billet, Flannery, and Garfinkel (2006) find bank loan financing firms suffer negative
abnormal stock returns over the subsequent three years, and this long-run
underperformance is similar to that seen with other debt issuing or equity offering firms.
They also find that larger loans are followed by even worse stock performance.
The analysts’ forecasts and recommendations influence other participants in the
market. If analysts are over-optimistic with regard to the prospects of the bank loan
financing firms, we expect to see stock underperformance with such borrowers in the
long-run. Rajan and Servaes (1997) investigate the relationship between analysts’
overoptimism and the long-run stock performance of IPO firms. Their empirical results
show that such firms have worse stock performance when analysts are more optimistic
about their long-run growth prospects. Thus, we also expect that more analysts’
overoptimism is associated with worse long-run stock performance for firms
announcing bank loan financing.
Hypothesis 3: The long-run performance of firms announcing bank loans is negatively
related to analysts’ overoptimism.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 10/33
9
III. Methodology and Data
Data
We collect the bank loan announcements of U.S. firms from the Factiva database by
searching for news from 1996 to 2003. The bank loan financing firms in our sample are
required to be listed on New York Stock Exchange (NYSE), National Association of
Securities Dealers Automated Quotations (NASDAQ), or American Stock Exchange
(AMEX). Because we need the analyst data, the analyst following information for the
bank loan financing firms must be available in the Institutional Brokers Estimate
System (IBES). Table 1 is the distribution of bank loan announcements from 1997 to
2003. In this period, 1,486 bank loan announcements were made, and there are 1,366
related analysts’ forecasts in IBES. Panel A shows the sample distribution for each year,
while Panel B shows the industry of the bank loan announcing firms, with the majority
being manufacturing companies.
------------------------------
Insert Table 1
------------------------------
Analyst Forecast Error and Overoptimism
We use the forecast error to test whether the analysts make systematic errors in
forecasting the bank loan financing firms’ performance. Forecast errors are calculated
as in this equation:
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 11/33
10
Forecast Earningsof Timetheat PriceStock
Forecast Earning- Earnings Actual Error Forecast Earnings =
Forecasts are available on a monthly basis and made for periods of up to two fiscal
years in the future. In order to test whether analysts’ forecasts become more accurate
over time, we calculate the difference between those made within one year after the
bank loan announcement, and those made from one to two years after the bank loan
announcement. For more evidence, we collect industry- (two-digit SIC code) and
size-matched firms from CRSP to adjust the forecast error to test whether the analysts
are more optimistic with regard the bank loan financing firms.
In addition to earnings forecast, analysts also make long-term earnings projections.
Rajan and Servaes (1997) indicate that the long-term earnings forecasts should be
thought of as a measure of the relative optimism of analysts. We present the long-term
growth forecasts from the bank loan announcement to two years later. The
industry-adjusted long-term growths forecasts are computed by subtracting the average
of all firms with the same two-digit SIC code.
Long-term Performance
Following Billet, Flannery, and Garfinkel (2006), we adopt the stock buy-and-hold
return and return of calendar time portfolio to measure the long-term performance of
the bank loan financing firms. In addition, we adjust the buy-and-hold return to the
following three benchmarks to reduce the bias: industry- and size-matched firm, CRSP
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 12/33
11
NYSE/AMEX/NASDAQ value weighted index, and CRSP NYSE/AMEX/NASDAQ
equal weighted index. The buy-and-hold abnormal returns (BHAR) for stock i from
time a to b is defined as:
b a,control,b a,i,b a,i,BHR -BHR BHAR =
Where BHRi,a,b is the buy-and-hold returns of the sample firm and BHRcontrol,a,b is the
buy-and-hold returns of the control benchmarks. We adopt the model in Rajan and
Servaes (1997) to measure the long run performance of bank loan announcements. We
divide our sample firms into quartiles according to their industry-adjusted long-term
growth forecasts and compare the benchmark adjusted long-term stock returns for the
bank loan borrowers in the different quartiles. We employ the first long-term earnings
growth made in the year after the bank loan announcement and exclude returns
computed over the first 252 trading days from our analysis, because not all growth
forecasts are available during this period. The industry-adjusted long-term growth
forecasts are computed by subtracting the average long-term growth forecast for firms
in the same industry from IBES.
We use the regression model to test the relationship between the analysts forecasts
and the long-run performance of bank loan financing firms. The dependent variable is
the buy-and-hold returns (BHAR), and the independent variable is the industry-adjusted
long-term growth forecast (LF) made by analysts. Additionally, we have several control
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 13/33
12
variables in this regression. The loan characteristic variables are as follows.
Relative loan size (RLS) is computed as the logarithm of the amount of a firm’s bank
loan divided by its market value. Relative loan size is statistically significant in Billet,
Flannery and Garfinkel’s (2006) research; they found larger relative loan sizes are
associated with worse ex-post peer-adjusted returns. Moreover, poor ex-ante performers
tend to take on relatively larger loans, on which the lender chargers a higher rate spread.
Consequently, we include this variable because relative loan size can significantly
affect borrowing firms’ long-term performance.
Frequency (FRE) is a dummy variable. If the news indicates that the agreement is new,
we classify it as a new loan, and the dummy variable value is zero. If the news indicates
that the agreement is a revision, extension, or replacement of existing credit agreements,
we classify it as a revised loan, and the dummy variable value is one. Lummer and
McConnell (1989) found only favorable loan revisions have positive abnormal returns,
and this suggests that revised loans are more likely than new ones to be based on a
strong banking relationship.
Bank number (BN) is a dummy variable. If a firm borrows from only one bank, we
classify it as a single loan, and the dummy variable value is zero. However, if a firm’s
bank loan is credited by many banks, we classify it as a syndicated loan, and the
dummy variable value is one. Preece and Mullineaux (1996) find that a borrower’s
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 14/33
13
announcement return is inversely related to the number of lenders in the loan syndicate.
This is because loans involving a large syndicate are more likely to suffer from the
hold-out problem and are more difficult to renegotiate if the borrower is financially
distressed. Therefore we include this variable to test whether single or syndicated loans
may affect future returns.
The firm characteristic variables are as follows:
Firm size (SIZE) is computed as the logarithm of the market value of equity. Billet,
Flannery and Garfinkel (2006) include firm size as one of their control variables.
Equity book-to-market ratio (BM) is computed as log of equity book value divided
by market value. Billet, Flannery and Garfinkel (2006) include equity’s book-to-market
ratio as one of their control variables. We construct our regression as follows:
i i 6 i 5 i 4 i 3 i 2 i i i ε BN β FRE β RLS β BM β SIZE β LF β α BHAR +++++++=
Mitchell and Stafford (2000) propose that each sample firm’s BHAR tends to be
correlated with other BHARs, and thus the significance of this statistic might be
overstated. They suggest using a calendar time portfolio to control the calendar time
event-clustering problem, and thus in this study we adopt the Fama and French (1993)
three-factor model to measure long-term abnormal stock returns.
t t t ft mt ft pt HMLSMB R R R R ε β β β α +++−+=− hsm )(
Where pt R
is the equal-weighted or capitalization value-weighted average raw return
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 15/33
14
for a stock in calendar month t (where a sample stock is included if month t is within
the 36-month period following its bank loan announcement). ft R is the one month
T-bill return, mt R is the CRSP value-weighted market index return, t SMB is the return
on a portfolio of small stocks minus the return on a portfolio of large stocks, and
t HML is the return on a portfolio of stocks with high book to market ratio minus the
return on a portfolio of stocks with low book-to-market ratio.
We also estimate the abnormal stock returns with a fourth factor, t UMD , which is the
return on high momentum stocks minus the return on low momentum stocks. Because
Carhart (1997) shows the importance of momentum in expected return measures, we
refer to the following model as the Carhart four-factor model:
t t t t ft mt ft pt UMD HMLSMB R R R R ε β β β β α ++++−+=− uhsm )(
We use the intercept term,α , in the three-factor and four-factor models to measure the
average monthly abnormal returns for the calendar time portfolio.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 16/33
15
IV. Empirical Results
In this study, we use forecast errors and long-term growth projections to measure
analysts’ overoptimism. Earnings forecast errors are reported in Table 2. Panel A shows
the analysts forecasts made within one year of the bank loan announcement. The error
as a percentage of stock price is -0.001 for forecasts made for a three-month window,
and this rises to -0.005 when the window increases to nine months. After controlling the
forecast error for the size- and industry- matched firms, the adjusted forecast errors in
the fourth column are still significant. The results support the proposal that analysts are
over-optimistic with regard to firms with bank loan financing. Panel B reports the
forecast errors made from one to two years after the bank loan announcement, and the
forecast error is still significant. The results thus show that the forecast accuracy does
not improve one year after the bank loan announcement, which means that analysts
continue to be over-optimistic about firms with bank loan financing.
------------------------------
Insert Table 2
------------------------------
Analysts make long-term earnings growth projections to forecast firms’ growth
potential. Table 3 reports a detailed analysis of the long-term earnings growth forecasts
over a two-year period following the bank loan announcements. We only focus on the
growth forecasts for the last month of each quarter. Following Rajan and Servaes
(1997), we use the five-year horizon long-term forecast to measure the analysts’
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 17/33
16
accuracy. In Table 3, we find that the long-term growth forecasts within one year of a
bank loan announcement are about 16%. After more than one year after the bank loan
announcement, the growth forecasts decrease to 15%. In addition, we find that forecasts
for bank loan financing firms are 3.38% higher than for size and industry-matched
firms in the three- to six-month period after the bank loan announcement. After one
year, the growth expectations fall to about 1.65%, and then to only 1.31% two years
after the announcement. The results demonstrate that the analysts do indeed have more
optimistic expectations for bank loan financing firms. However, the shrinking
difference in long-term growth forecasts with regard to bank loan financing firms and
industrial average shows that analysts adjust their expectations over time.
------------------------------Insert Table 3
------------------------------
Table 4 shows descriptive statistics of the three-year buy-and-hold returns of the
bank loan financing firms. In addition to raw returns, we also try to control for the
value-weighted market returns, equal-weighted market returns, and size- and
industry-matched firms. After controlling for the equal-weighted market returns or size-
and industry-matched firms, we find that on average the bank loan financing firms
underperform in the long run.
------------------------------
Insert Table 4
------------------------------
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 18/33
17
We adopt the Fama French (1993) three-factor model and Carhart’s (1997)
four-factor model to test the long run performance of the bank loan financing firms. In
these two models, the intercept means the abnormal returns of the calendar time
portfolio. In Table 5, we can observe the significantly negative abnormal returns in
these models, which mean that on average the bank loan financing firms have poor
performance in the long run. We get the similar results using either value-weighted or
equal-weighted calendar-time portfolios.
------------------------------
Insert Table 5
------------------------------
The results thus show that analysts have over-optimistic expectations for bank loan
financing firms, and that consequently the firms underperform in the long run. We try to
examine the relationship between analysts’ forecasts and the bank loan financing firms’
long-run performance. We use the forecasted industry adjusted growth quartiles model
that appears in Rajan and Servaes (1997). In Table 6, we use the quartiles as
benchmarks to divide the industry-adjusted long-term growth forecast into four groups.
Higher industry-adjusted long-term growth means analysts are more optimistic with
regard to the firms’ growth potential and future prospects. When the analysts make
more optimistic growth forecasts, the three-year buy-and-hold returns are lower. The
results in Table 6 show an inverse relationship between the analysts’ forecasts and the
long-run stock performance of the bank loan financing firms. The inverse relationship
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 19/33
18
provides evidence to support the notion that analysts are over-optimistic with regard to
the bank loan financing firms.
------------------------------
Insert Table 6
------------------------------
We also use regression to test the effect of analysts’ optimism on the borrowing firms.
We use the three years buy-and-hold returns as the dependent variable. The
buy-and-hold return is calculated from 256 to 1,008 trading days after the bank loan
announcement. The independent variable is the adjusted long-term growth forecast (LF)
made within 256 trading days after bank loan announcement. Additionally, there are
still other control variables to control effects from other possible factors. Table 7 shows
the regression results. In Models 1 and 2, the coefficients of the analysts’ long-term
forecast are negatively significant, even when other factors are controlled for. However,
Model 3 does not provide effective evidence of this, and its explanatory power is
weaker.
------------------------------
Insert Table 7
------------------------------
In addition to the regression model, we adopt calendar-time portfolios to examine the
relationship between analysts’ overoptimism and the long-term buy-and-hold returns
after bank loan announcements. In Table 8, we show the results of the Fama-French
(1993) three-factor and Carhart (1997) four-factor models. ( R1 - R2) is the excess
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 20/33
19
portfolios returns of those forecast with and without overoptimism. R1 is the
over-optimistic portfolio return for month t , we adopt the most optimistic group in
Table 6 (industry adjusted long-term growth forecasts greater than 2.4508). R 2 is
non-over-optimistic portfolio returns; we adopt the least optimistic group in Table 6
(industry adjusted long-term growth forecasts less than 4.2675). If α is negative, it
means that analysts’ overoptimism may lead to negative long-term abnormal returns. In
panels A and B of Table 8, the results of interceptα in value-weighted and
equal-weighted cases are both negative. This means that analysts’ overoptimism has an
inverse relation with bank loan financing firms’ long-term performance. This result is
also consistent with our expectation, and shows that higher analysts’ forecasts may lead
to worse long-term stock returns for bank loan financing firms.
------------------------------
Insert Table 8
------------------------------
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 21/33
20
V Conclusions
This study investigates whether or not analysts’ overoptimism can explain the negative
long-term performance of bank loan financing firms. We use earnings forecast errors
and long-term earning growth projections to examine analysts’ overoptimism.
Buy-and-hold abnormal returns and calendar-time portfolios are used to examine the
bank loan financing firms’ long run performance. Finally, we adopt the forecasted
industry adjusted growth quartiles model, regression model and calendar-time portfolio
regression model to examine the relationship between analysts’ overoptimism and the
long-term stock performance of bank loan financing firms.
This study has three major findings. First, analysts are systematically over-optimistic
with regard to bank loan financing firms, and they may adjust their forecasts over time.
Second, bank loan financing firms in our sample from 1997 to 2003 have negative
long-term stock performance. Equal-weighted BHAR returns, matched firm BHAR
returns, and the results of the Fama-French three-factor and Carhart four-factor
portfolio models all show that bank loan financing firms have negative long-term stock
returns. We thus conclude that bank loan financing firms may have negative long-term
abnormal returns. Third, firms perform poorly in the long run when analysts are more
optimistic about their long-run growth projections. The forecasted industry adjusted
growth quartiles model shows that the higher analysts’ long-term forecasts, the worse
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 22/33
21
the long-term performance. In the regression model, the results show an inverse
relationship between analysts’ long-term forecasts and the long-term stock performance
of bank loan financing firms. The results of the calendar-time portfolio model also
imply negative long-term performance for firms’ with over-optimistic forecasts.
Therefore, we can conclude that analyst overoptimism may be one explanation for bank
loan financing firms’ long run negative stock performance.
Analysts may issue favorable forecasts for some companies because they have a
relation with these firms, and want to bring in future investment banking business. So
analysts tend to give more coverage to these companies and provide over-optimistic
forecasts. Furthermore, Das et al. (2006) suggest that the new issue underperformance
puzzle exists among those firms which receive insufficient coverage. Therefore bank
loan financing firms’ negative long-term abnormal returns may result from the analysts’
selective coverage, and thus further studies can examine whether analysts have
relationships with the bank loan financing firms, and distinguish the purpose of their
forecast, to see whether they have any ulterior motive or not. By clarifying the
relationships with bank loan financing firms, we can better understand whether
analysts’ overoptimism is one explanation for bank loan financing firms’ long-term
negative returns.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 23/33
References
Ackert, Lucy F., and George Athanassakos, 2003, A simultaneous equations analysis
of analysts' forecast bias, analyst following, and institutional ownership,
Journal of Business Finance & Accounting 30, 1017-1041.
Besanko, D., David Besanko, G. Kanatas, and George Kanatas, 1993, Credit market
equilibrium with bank monitoring and moral hazard, Review of Financial
Studies 6.
Best, Ronald, and Hang Zhang, 1993, Alternative information sources and the
information content of bank loans, Journal of Finance 48, 1507-1522.
Billet, Matthew T., Mark J. Flannery, and Jon A. Garfinkel, 2006, Are bank loans
special? Evidence on the post-announcement performance of bank borrowers,
Journal of Financial & Quantitative Analysis 41, 733-751.
Carhart, Mark M., 1997, On persistence in mutual fund performance, Journal of
Finance 52, 57-82.
Chahine, Salim, 2004, Long-run abnormal return after IPOs and optimistic analysts'
forecasts, International Review of Financial Analysis 13, 83.
Das, Somnath, G. U. O. Re-Jin, and Zhang Huai, 2006, Analysts' selective coverage
and subsequent performance of newly public firms, Journal of Finance 61,
1159-1185.
Datta, Sudip, Maik Iskandar-Datta, and Ajay Patel, 1999, Bank monitoring and the
pricing of corporate public debt, Journal of Financial Economics 51, 435-449.
Dechow, Patricia M., Amy P. Hutton, and Richard G. Sloan, 2000, The relation
between analysts' forecasts of long-term earnings growth and stock price
performance following equity offerings, Contemporary Accounting Research
17, 1-32.
Diamond, Douglas W., 1984, Financial intermediation and delegated monitoring,
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 24/33
Review of Economic Studies 51, 393.
Diamond, Douglas W., 1991, Monitoring and reputation: The choice between bank
loans and directly placed debt, Journal of Political Economy 99, 689.
Eckbo, B. Espen, 1986, Valuation effects of corporate debt offerings, Journal of
Financial Economics 15, 119-151.
Fama, Eugene F., 1985, What’s different about banks?, Journal of Monetary
Economics 15, 29-39.
Fama, Eugene F., and Kenneth R. French, 1993, Common risk factors in the returns
on stocks and bonds, Journal of Financial Economics 33, 3-56.
Fried, Dov, and Dan Givoly, 1982, Financial analysts' forecasts of earnings, Journal
of Accounting & Economics 4, 85-107.
Givoly, Dan, and Josef Lakonishok, 1979, The information content of financial
analysts' forecasts of earnings, Journal of Accounting & Economics 1,
165-185.
James, Christopher, 1987, Some evidence on the uniqueness of bank loans, Journal of
Financial Economics 19, 217-235.
James, Christopher, and Jason Karceski, 2006, Strength of analyst coverage following
IPOs, Journal of Financial Economics 82, 1-34.
Lummer, Scott L., and John J. McConnell, 1989, Further evidence on the bank
lending process and the capital-market response to bank loan agreements,
Journal of Financial Economics 25, 99-122.
Michaely, R., Roni Michaely, K. L. Womack, and Kent L. Womack, 1999, Conflict of
interest and the credibility of underwriter analyst recommendations, Review of
Financial Studies 12.
Mitchell, Mark L., and Erik Stafford, 2000, Managerial decisions and long-term stock
price performance, Journal of Business 73, 287.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 25/33
Preece, Dianna, and Donald J. Mullineaux, 1996, Monitoring, loan renegotiability,
and firm value: The role of lending syndicates, Journal of Banking & Finance
20, 577-593.
Rajan, Raghuram, and Henri Servaes, 1997, Analyst following of initial public
offerings, Journal of Finance 52, 507-529.
Ritter, Jay R., 1991, The long-run performance of initial public offerings, Journal of
Finance 46, 3-27.
Spiess, D. Katherine, and John Affleck-Graves, 1995, Underperformance in long-run
stock returns following seasoned equity offerings, Journal of Financial
Economics 38, 243-267.
Zhaoyang, Gu, and Xue Jian, 2007, Do analysts overreact to extreme good news in
earnings?, Review of Quantitative Finance & Accounting 29, 415-431.
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 26/33
Table 1
Distribution of Bank Loan Financing FirmsThis table summarizes the sample distribution of bank loan financing firms listed on the New York
Stock Exchange (NYSE), the American Stock Exchange (AMEX), or the NASDAQ exchange from1997 to 2003. The sample is collected from the Factiva database. 1,486 firms meet the samplerestrictions. Number on Institutional Brokers Estimate System (IBES) refers to the number of bank loan financing (BLF) firms that listed on the IBES database within two years of the bank loan financing(BLF). The two-digit SIC code is obtained from Compustat.
Panel A: Distribution of Sample Over Time
Offering Year Observations % Available in IBES %
1997 157 10.49 145 10.611998 240 16.04 212 15.521999 298 19.92 270 19.772000 139 9.29 125 9.15
2001 154 10.29 142 10.402002 231 15.44 214 15.67
2003 267 17.85 258 18.89Total 1486 100 1366 100.00
Panel B: Distribution of Sample across Two-Digit SIC Codes
IndustryTwo-digit
SICObservations %
Available in
IBES%
Agriculture, Forest and Fishing 01~09 7 0.47 5 0.37Mining 10~14 82 5.52 81 5.93Construction 15~17 48 3.23 46 3.37Manufacturing 20~39 463 31.16 426 31.19Transportation and
Communications40~48 140 9.42 139 10.18
Wholesale Trade 50~51 80 5.38 68 4.98
Retail Trade 52~59 139 9.35 128 9.37
Finance, Insurance, and RealEstate
60~67 260 17.5 222 16.25
Services 70~89 263 17.7 247 18.08Public Administration 91~99 4 0.27 4 0.29Total 1486 100 1366 100
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 27/33
Table 2
Analyst Earnings Forecast Errors for Bank Loan Financing FirmsThis table presents average analyst earnings forecast errors for the bank loan financing firms. Our
sample comprises 1,486 companies between 1997 and 2003. Only earnings forecasts made for firmslisted on IBES within two years of the bank loan financing (BLF) are included. The forecast error is
computed as: (Actual earnings –Earnings forecast) / Stock price at the time of the earning forecasts.We report forecast errors for forecast windows of three through 12 months in three-month intervals.Window is the number of months between when the forecast is made and the fiscal year end for whichthe forecast is made. Matched firm adjusted forecast errors are computed by subtracting the forecasterror of the firm with the same SIC code closest in size to the BLF firm. The number of observations inthe matched firm adjusted sample is smaller, because no matched firms can be found for certainforecast windows. The parentheses report the p-value of the t-statistics. “***” represents a 1%significance level; “**”represents a 5% significance level; “*” represents a 10% significance level.
Panel A: Forecasts Made Within One Year of BLF
Window Forecast Error Number of BLFMatching Firm
Adjusted Forecast Error Number of BLF
3 -0.001 (0.000)*** 1052 -0.000 (0.043)** 8336 -0.003 (0.000)*** 1061 -0.001 (0.014)** 8379 -0.005 (0.000)*** 1035 -0.002 (0.000)*** 816
12 -0.002 (0.000)*** 626 -0.002 (0.003)*** 510
Panel B: Forecasts Made Between One and Two Years of BLF
Window Forecast Error Number of BLFMatching Firm
Adjusted Forecast Error Number of BLF
3 -0.001 (0.000)*** 1063 -0.000 (0.015)** 828
6 -0.003 (0.000)*** 1006 -0.002 (0.000)*** 7759 -0.005 (0.000)*** 972 -0.003 (0.000)*** 77112 -0.002 (0.000)*** 589 -0.003 (0.000)*** 484
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 28/33
Table 3
Forecasts of Long Term Earnings Growth for Bank Loan Financing FirmsThis table presents average forecasts of long-term earnings growth for the bank loan financing (BLF)
firms. Only long-term earnings growth forecasts made for firms listed on IBES within two years of theBLF are included. We report long term growth forecasts for time period of three through 12 months in
three-month intervals. Time refers to the time period after the BLF that the forecast is made.Industry-adjusted long term growth rates are computed by subtracting the average of all firms with thesame two-digit industry code. The parentheses report the p-value of the t-statistics. “***” represents a1% significance level; “**”represents a 5% significance level; “*” represents a 10% significance level.
TimeLong-term Growth
Forecasts (in %)
Number of
BLF
Industry-Adjusted Long term
Growth Forecasts (in %)
Number of
BLF
3 months 16.000 894 3.380 (0.002)** 8946 months 16.000 911 3.501 (0.003)** 9119 months 16.000 924 2.701 (0.002)** 92412 months 15.500 925 1.653 (0.002)** 92515 months 15.000 916 1.644 (0.000)*** 916
18 months 15.000 899 1.692 (0.000)*** 89921 months 15.000 893 1.260 (0.000)*** 893
24 months 15.000 890 1.310 (0.000)*** 890
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 29/33
Table 4
Three Year Performance for Bank Loan Financing FirmsThis table presents three year stock performance for the bank loan financing (BLF) firms. Our sample
comprises 1,471 bank loan announcements made between 1997 and 2003. Table V reports buy-and-hold returns (BHR) for the sample firms and buy-and-hold adjusted returns (BHAR) for the
sample firms relative to benchmarks (market index or matched firms), for the 1,008 trading daysstaring 252 days after the BLF. The BHAR is the difference between the BHR on the sample firm andthat of the benchmarks. Matching firm is matched by the same industry and closest in size. “***”represents a 1% significance level; “**”represents a 5% significance level; “*” represents a 10%significance level.
BHAR Raw Return Value-weighted
Market ReturnsEqual-weightedMarket Returns
Size/IndustryMatched
Observation 1471 1471 1471 1471Median 0.268 0.114 -0.517 -0.059Mean 0.453 0.307 -0.326 -0.141
t-stat 14.222 10.136 -10.848 -3.118 p-value (0.000)*** (0.000)*** (0.000)*** (0.002)**
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 30/33
Table 5
Long-run Returns Following Private Placements Calendar-Time PortfoliosThis table reports the unadjusted intercept from calendar-time portfolio regressions:
Fama-French's (1993) Three-Factor Model:t t t ft mt ft pt HMLSMB R R R R ε β β β α +++−+=− hsm )(
Carhart' s (1997) Four-factor Model:
t t t t ft mt ft pt UMD HMLSMB R R R R ε β β β β α ++++−+=− uhsm )(
The dependent variables (R pt - R ft) are event portfolio returns, R p, in excess of the treasury bill rate, R ft.
Each month, we form a portfolio of all sample firms that have BLF from 13th month to 48th month.The factors, from Fama and French (1993) and Carhart (1997), are the excess returns on the market portfolio (R pt - R ft), the difference in returns between the portfolios of small stocks and big stocks(SMBt), and the difference in returns between the portfolios of high book-to-market stocks and low book-to-market stocks (HMLt). The UMDt is defined as the difference between a portfolio return of stocks with the highest 30 percent returns and a portfolio return of stocks with the lowest 30 percentreturns. The intercept α measures the monthly abnormal returns, given the model. “***” represents a
1% significance level; “**”represents a 5% significance level; “*” represents a 10% significance level.Panel A: Fama-French Three-factor Model
Value-weighted Equal-weighted
α Adjusted-R 2 α Adjusted-R 2
Sample -0.007 -0.008 p-value (0.028)**
0.216(0.003)***
0.676
Portfolio Number 115 115
Panel B: Carhart Four-factor Model
Value-weighted Equal-weighted
α Adjusted-R 2 α Adjusted-R
2
Sample -0.006 -0.007 p-value (0.043)**
0.259(0.010)***
0.692
Portfolio Number 115 115
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 31/33
Table 6
Long-term Performance for Bank Loan Financing Firms
by Adjusted Long-term Growth Forecasts Groups
This table presents three year stock performance for the bank loan financing (BLF) firms, classified bythe forecasts of long-term earnings growth. Our sample comprises 246 bank loan announcements made between 1997 and 2003. The average industry-adjusted long-term growth forecast is reported for firmsafter the BLF. Industry-adjusted long-term growth forecasts are computed by subtracting the averagelong-term growth forecast for all firms in the industry. Industry is defined at the two-digit SIC codelevel. We divide the industry adjusted long-term growth forecast into four groups. Buy-and-hold
returns (BHR) are computed over the 1,008 trading days (approximately three years) staring 252 daysafter the BLF. The BHAR is the difference between the BHR on the sample firm and that of the
benchmarks (market return or matched firm). Matching firm is matched by the same industry andclosest in size. Cross-sectional p-values are reported in parentheses. “***”represents a 1% significancelevel; “**”represents a 5% significance level; “*”represents a 10% significance level.
BHAR Industryadjusted
Long-termGrowth
Forecasts
Observation Raw Return Value-weightedMarket Returns
Equal-weightedMarket Returns
Size/IndustryMatch
0.507 0.374 -0.288 -0.054Less than-4.2675
247(0.000)*** (0.000)*** (0.000)*** (0.442)
0.553 0.331 -0.237 -0.043-4.2675 to
-0.4389246
(0.000) (0.000)*** (0.001)*** (0.620)0.385 0.234 -0.376 -0.253-0.4389 to
2.4508246
(0.000)*** (0.000)*** (0.000)*** (0.010)**0.185 0.107 -0.531 -0.393Greater than
2.4508246
(0.020)** (0.177) (0.000)*** (0.001)***
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 32/33
Table 7
Regressions of Long-run Stock Performance of Bank Loan Financing FirmsThis table presents regression analyses of the long run stock performance for BLF firms against the
adjusted long-term growth forecasts and control variables. The sample consists of 985 BLF in the period from 1997 to 2003. The following regression is conducted:
i i 6 i 5 i 4 i 3 i 2 i i i ε BN β FRE β RLS β BM β SIZE β LF β α BHAR +++++++=
The dependent variable BHAR i is the three-year buy-and-hold abnormal returns for firm i. BHR arecomputed over the 1,008 trading days (approximately three years) staring 252 days after the BLF. Thelong-term growth forecasts (LF) is the average industry-adjusted long-term growth forecast reportedfor a firm after the BLF. Industry-adjusted long-term growth forecasts are computed by subtracting theaverage long-term growth forecast for all firms in the industry. Industry is defined at the two-digit SICcode level. SIZE is borrowing firm size computed as log of market value of equity. Book to market
ratio BM is computed as log of equity book value divided by market value. Relative loan size RLS iscomputed as log of bank loan amount divided by market value. Frequency FRE is a dummy variable,and the value is zero if it is a new loan and one if it is a revised loan. Bank number BN is a dummyvariable, and the value is zero if it is a single loan and one if it is a syndicated loan. The p-values are in
parentheses. “***” represents a 1% significance level; “**” represents a 5% significance level; “*”represents a 10% significance level.
Model 1 2 3
Dependent Variables-BHAR Independent Variables Value-weighted
Market ReturnsEqual-weightedMarket Returns
Size/IndustryMatched
Intercept -0.212 0.584 0.756(0.000)*** (0.000)*** (0.000)***
LF -0.002 -0.004 -0.001
(0.050)** (0.010)* (0.810)SIZE 0.185 0.092 -0.023
(0.000)*** (0.002)** (0.821)
BM 0.138 0.014 0.072(0.000)*** (0.696) (0.546)RLS 0.058 0.021 0.028
(0.000)*** (0.344) (0.714)FRE -0.057 0.006 0.037
(0.008)*** (0.835) (0.703)BN -0.001 -0.048 -0.127
(0.962) (0.053)* (0.137)985 985 985 Number of BNFa
Adjusted-R 2
0.110 0.022 0.000a Number of observations differ due to availability of control variables data .
8/3/2019 Analyst Optimism Loan Announcement and Firm Performance - Chang 2010
http://slidepdf.com/reader/full/analyst-optimism-loan-announcement-and-firm-performance-chang-2010 33/33
Table 8
Long-run Calendar-time Portfolio Returns on Bank Loan Financing Firms
by Forecasted Industry Adjusted Growth Groups
This table reports the monthly abnormal returns from the calendar-time portfolio stratified by theforecasts of long-term earnings growth. We adopt two calendar-time models as the following:Fama-French's (1993) Three-Factor Model:
t t t ft mt t t HMLSMB R R R R ε β β β α +++−+=− hsm21 )(
Carhart's (1997) Four-factor Model:
t t t t ft mt t t UMD HMLSMB R R R R ε β β β β α ++++−+=− uhsm21 )(
The dependent variables (R 1t - R 2t) are event portfolio returns, R 1t is over-optimistic portfolio return for month t, we adopt the most optimistic group in table 6 (industry adjusted long-term growth forecastsgreater than 2.4508), R 2t is non-over-optimistic portfolio returns, we adopt the least optimistic group in
Table 6 (industry adjusted long-term growth forecasts less than -4.2675), (R 1t - R 2t) is the excess portfolios returns for those forecast with overoptimism and without overoptimism. The factors, from
Fama and French (1993) and Carhart (1997), are the excess returns on the market portfolio (R mt - R ft),
the difference returns between the portfolios of small stocks and big stocks (SMBt), and the differencereturns between the portfolios of high book-to-market stocks and low book-to-market stocks (HML t).The UMDt is defined as the difference between portfolio return of stocks with the highest 30 percentreturns and portfolio return of stocks with the lowest 30 percent return. The intercept α measures themonthly abnormal return. Industry-adjusted long-term growth forecasts are computed by subtracting
the average long-term growth forecast for all firms in the industry. Industry is defined at the two-digitSIC code level. “***” represents a 1% significance level; “**”represents a 5% significance level; “*”represents a 10% significance level.
Panel A: Fama-French Three-factor Model
Value-weighted Equal-weighted
α (%) Adjusted-R 2 α (%) Adjusted-R 2
Sample -0.006 -0.017
p-value -0.5690.216
-0.2590.172
Portfolio Number 115 115
Panel B: Carhart Four-factor Model
Value-weighted Equal-weighted
α (%) Adjusted-R 2 α (%) Adjusted-R
2
Sample -0.010 -0.022 p-value -0.306
0.259-0.136
0.2
Portfolio Number 115 115