Private Lenders’ Use of Analyst Earnings Forecasts When Establishing Debt Covenant Thresholds

We examine whether lenders use analyst forecasts of the borrower’s earnings as inputs when establishing covenant thresholds in private debt contracts. We find that, among debt contracts that include an earnings covenant, earnings thresholds are set closer to analyst forecasts when analysts have historically issued more accurate earnings forecasts. These results are robust to firm fixed effects and an instrumental variable approach. Further, we find that, following a plausibly exogenous decline in the availability of analyst earnings forecasts, debt contracts are less likely to include earnings covenants. Our evidence is consistent with lenders using analyst earnings forecasts as an input when establishing debt covenant thresholds and suggests sell-side analysts play a role in debt contracting.