Loan Spreads and Unexpected Earnings

This paper explores whether banks have superior information to financial analysts about borrowers' future earnings at the financing decision stage. The results suggest that at the loan initiation banks have "priced-in" borrowers' future earnings news that is unexpected by analysts. The sensitivity of loan spreads to unexpected earnings varies cross-sectionally and over time in the same direction as the predicted changes in banks' relative information advantages. Further tests show that the results are robust to alternative measures of unexpected earnings, and are unlikely to be driven by correlated omitted risk factors.