<b>Bank-Firm Relationships and Security Analyst Activities: </b><b>Evidence from Japan</b>

Abstract

Banks play a critical role in corporate governance in many economies around the world. This paper empirically compares the activities of security analysts (i.e., analyst coverage, forecast accuracy and forecast agreement) between firms with and without close working relationships with their banks in order to gain insights into how bank-firm relationships affect the information environments for capital market investors. Close bank-firm relationships signal the banks' positive evaluation of the firms because the banks screen the firms before entering or extending the relationships. Further, during the relationships, the banks monitor these firms. Thus, capital market investors are less motivated to scrutinize the firms, thereby demand less information. Investigating Japanese firms, we document that security analysts' forecasts are less accurate and less agreed (i.e., more dispersed) for the firms with long-established relationships with banks. Likewise, analyst coverage, forecast accuracy and forecast agreement are all lower for the firms with a larger amount of loans (i.e., private debt). The associations between bank-firm relationships and security analyst activities hold after controlling for the potential correlated variables (i.e., capital market financing, performance volatility, financial distress, cross-holding). JEL Classification: M41; G21; G32

The Effect of Bank Loan Dependence on Management and Analyst Forecasts

“…To test the information environment, we investigate analyst forecast error, analyst coverage, and analyst forecast dispersion. Koga and Uchino (2012) find that analyst coverage, analyst forecast accuracy, and forecast agreement (i.e., analyst forecast dispersion) are all lower for firms with long-term-established relationships with banks. Because investors do not require analyst information when bank monitoring works well, and because they can rely on bank monitoring in such firms, the following hypotheses apply.…”

“…The information environment is also influenced by bank-loan dependence. Koga and Uchino (2012) show that the bank-firm relationship influences the information environments of many analysts. They find that analyst coverage, analyst forecast accuracy, and forecast agreement (i.e., analyst forecast dispersion) are all lower for firms having long-term-established relationship with banks.…”

“…Therefore, we research disclosures of firms that depend on bank loans. Additionally, as Koga and Uchino (2012) points out, demand for in-depth research of analyst is low for firms dependent on banks loans. Thus, we also investigate the information environment.…”

“…Furthermore, management and analyst forecasts are less incorporated in stock prices, because investors do not refer to the information; they instead rely on bank monitoring for firms that depend on bank loans. Koga and Uchino (2012) provide evidence that the information environments of firms with longestablished relationship with banks are less rich in Japan. By contrast, our research provides two contributions.…”

“…Additionally, some studies showed that information environments, such as analytical environments, are not enough for firms that depend on bank loans. Koga and Uchino (2012) investigate the role of firm analysts who have long-established relationships with banks, finding that analyst coverage, analyst forecast accuracy, and forecast agreement (i.e., analyst forecast dispersion) are all lower for firms that have long-termestablished relationship with banks. Because long-term relationships suggest good evaluation by banks as banks monitor firms during the relationship.…”