Analyst Following And The Cost Of Debt

In order to ensure the healthy operation of a company’s capital chain, reducing the cost of debt has become a major proposition of external financing. The cost of debt is made by the determination of the people outside the company basing on the information of the company to potential default risk. Asymmetric information and agency problems enterprises faced will affect the level of debt financing costs. Information asymmetry and agency problems will affect the cost of debt financing, therefore, how to reduce the information asymmetry and the agency costs to lower the cost of debt is worth paying attention. Much domestic and foreign literature has pointed out that as an important external governance mechanism, analysts have played an important role in easing the company’s information asymmetry and agency problems.As an important disseminator of the information of the listed companies, analysts play a pivotal role in the running of the modern global capital markets. Through research, telephone interviews, reading performance reports, etc., analysts collect and process the information of listed companies they concerned, then releasing the earnings forecast report, rating reports, studies and other forms of report to provided investors about the past, present and future of information of the company, hence improved the investors’ perception of company and the efficiency of capital markets.However, compared to foreign mature capital markets, The development of the analysts industry in China is relatively slow, domestic researches on analysts are also less, especially with the fast growing of China’s analysts industry in recent years, whether analysts have become an important part of the external governance environment and regulatory power of the list companies is a question worth considering, listed companies are the main objects of analysts, analysts have special professional qualities and abilities, so we are concerned about that whether analysts following could improve the efficiency of debt financing of listed companies to reduce the cost of debt.Based on the cost of debt, this paper examines whether analyst following could the ease information asymmetry and reduce agency costs of the listed companies, combined with the financial environment and property rights of companies, the following issues are mainly studied:(1)Whether analysts following reduce the cost of debt?(2) Whether different financial environments affect the relationship between analysts following and the cost of debt?(3) Under different ownership properties, whether there is a difference relationship between analysts following and the cost of debt? What’s more, in different financial environments, whether such a difference has changed?In order to answer the above questions, based on China’s A-share listed companies from 2007 to 2010 as samples, this paper using OLS regression and Heckman test to examines the hypothesis proposed, results show that:(1)Analysts following can reduce the cost of debt;(2) After grouping according to the median of the financial environment index, it is found that in good financial environment, analysts following can reduce the cost of debt, but this effect is not reflected in poor financial environment;(3) After grouping based on the nature of property, it is found analysts following can reduce the cost of debt only in private listed companies, and this effect is not found in state-owned listed companies, further research shows that the effect in private listed companies needs good financial environment.On the whole, China’s analysts do have professional ability, they play a role in easing the information asymmetry and reducing the agency problem, thus helping companies to transfer information to the capital market and improving corporate governance environment, but this feature needs a good financial environment and more market-oriented property rights to play. According to this result, this paper argues that the regulatory authorities and other stakeholders should encourage the development of analyst industry, while improving the financial environment and supporting of the private economy.