Reg Presentation

Information Shocks and Debt Maturity
Daniel Jacobs
University of Houston
Department of Economics
October 10, 2017
Daniel Jacobs (University of Houston Department

Information
of Economics)
Shocks and Debt Maturity October 10, 2017 1 / 31
Motivation
Can firm-level uncertainty have a macroeconomic effect?

Information
of Economics)
Motivation
One possibility, a shock to information channels:

Changes to disclosure of firm information.
Changes to the information acquisition process.

Information
of Economics)
Motivation

As information channels change, investors’ valuation of firms can

become uncertain.

Information
of Economics)
Motivation

As information channels change, investors’ valuation of firms can

become uncertain.
Could this affect aggregate corporate debt maturity?

Information
of Economics)
Quiet Bubble?
Average US corporate debt maturity fell by 7% between 2008-2012.

Information
of Economics)
Quiet Bubble?

2007-2008: A ’quiet’ debt bubble (Hong and Sraer 2013)?
Disagreement between investors
Increasing valuation leads to less trading
High price, low trading relative to equity bubbles

Information
of Economics)
Quiet Bubble?

2007-2008: A ’quiet’ debt bubble (Hong and Sraer 2013)?
Disagreement between investors
Increasing valuation leads to less trading
High price, low trading relative to equity bubbles
Early 2000’s change in information disclosure regulation. Could this

have had an effect?
International Debt US Maturity

Information
of Economics)
My Contribution
Using the Regulation Fair Disclosure as a natural experiment, I find the

short debt to total debt ratio decreases by about 5 percentage points for
followed firms compared to unfollowed firms immediately following the
regulation.
The effect of the regulation is greatest for pre-regulation low
leveraged firms
Effect does not significantly differ by firm-size
Differential effect appears to wane overtime
Robustness Check: Regulation SHO pilot removal of short-sales

constraints.

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of Economics)
Regulation Fair Disclosure
Regulation Fair Disclosure: Effective October 23, 2000. Prohibits

selective disclosure on material information
Specifically, the regulation prevents management from using material

information as a commodity to gain favor with analysts or investors.
Post-Regulation
Turnover of All-Star analysts (Bagnoli, Watts and Zhang 2008)
Increase in forecast dispersion (Bailey et al. 2003)
Increase in independent research (Mohanram and Sunder 2006)
Use of new information channels (Yu and Webb 2017)
Notable exceptions: investment banks and credit rating agencies

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of Economics)
Methodology
Exploit Regulation Fair Disclosure’s (RegFD) prohibition on selective

disclosure using a difference-in-difference.

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of Economics)
Methodology
Exploit Regulation Fair Disclosure’s (RegFD) prohibition on selective

disclosure using a difference-in-difference.
All publicly-traded firms subject to the disclosure regulation.
Not all firms have security analyst coverage
Split sample into firms that always have security analyst coverage and
never have security analyst coverage
Sample from 1994Q1-2006Q4
Firms must exist for whole sample length.
Timeline

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of Economics)
Data Sources
Quarterly firm data from Compustat

Debt of various maturities
Time-varying firm controls
Quarterly Sell-side security analyst coverage from Institutional

Brokerage Estimate System (IBES).
Firms are considered covered for quarter t if at least one security
analyst gives an earnings-per-share (EPS) forecast in quarter t.

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of Economics)
Variable Creation - Independent Variables
RegFDt a dummy variable that takes 1 after RegFD becomes

effective.
Alwaysj a dummy variable that takes the value of 1 if a firm is always

covered by at least one security analyst and 0 if firm is never
covered by at least one security analyst.
Set of time-varying controls associated with debt maturity: firm size,

firm age, profitability, operating cash-flow, dividend payout,
depreciation and amortization and net physical property invested.
Dummy variable that takes a value of 1 after Global Analyst Research

Settlements.

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of Economics)
Variable Creation - Dependent Variable
ShortDebt
ShortDebtjt = (1)
ShortDebt + LongDebt
Short Debt: Debt of maturity under a year

Long Debt: Debt of maturity a year and longer.
Dot-com bubble?

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of Economics)
Variable Creation - Dependent Variable
ShortDebt
ShortDebtjt = (1)
ShortDebt + LongDebt
Short Debt: Debt of maturity under a year

Long Debt: Debt of maturity a year and longer.
Dot-com bubble?
Re-test sample with high-tech firms removed, following Heckler (2005)

Information
of Economics)
Summary Statistics
Table: Descriptive Statistics
Mean SD p25 p50 p75 N

Panel A: Followed Firm
Total Debtjt 5977.58 25601.86 362.77 1205.71 4144.64 9902
Cash Flowjt 2352.7 7040.5 178 531.6 1628.3 9902
Market Valuejt 14917.82 41326.45 1032.67 2861.42 10471.4 9902
Leveragejt .51 .18 .40 .53 .63 9902
Firm Agejt 37 13.9 28 40 49 9902
Panel B: Unfollowed Firm
Total Debtjt 616.49 2383.67 9.5 40.16 254.95 36860
Cash Flowjt 192.33 719.26 -.06 17.39 105.32 36860
Market Valuejt 1388.24 6387.21 33.16 1118.79 536.98 36860
Leveragejt .43 .22 .26 .43 .59 36860
Firm Agejt 30.60 14.99 18 31 44 36860

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of Economics)
Parallel Trends?
Excluding High-Tech Selected Debt Maturity

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of Economics)
Estimated Regression
ShortDebtjt = α + β1 RegFDt + β2 Alwaysj

(2)
+β3 RegFDt × Alwaysj + Xjt γ 0 + δj + νt + εjt
where Xjt is a vector of time-varying firm-level controls, δj is firm-fixed

effect for firm j, ν is quarter-fixed effect and εjt is an error term.

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of Economics)
Main Regression
Table: Dependent Variable: Short-Term Debt to Total Debt

Variables Model I Model II Ex. High-Tech
RegFDt × Alwaysj −.055∗∗∗ −.052∗∗∗ −.054∗∗∗
(.016) (.017) (.017)
RegFDt .039 .054 .088
(.059) (.061) (.442)
Alwaysj −.106∗∗∗ −.261∗∗∗ −.266∗∗∗
(.017) (.036) (.042)
N 40503 40503 40113
Firm fixed-effects? Yes Yes Yes
Quarter fixed-effects? Yes Yes Yes
R2 0.4990 0.4940 0.4933
Standard Errors clustered at firm-level and in parentheses. Coefficients and standard errors are rounded to thousandth place.
Firm controls include Size (log of market value), Firm Age, Net Property, Plant and Equipment, a dummy variable that takes
1 if firm j pays a dividend in quarter t, operating cashflow, a dummy variable that takes 1 after the Global Analyst Research
Settlement (GS), the book-to-market value, profitability which is the operating income before taxes divided by assets for the
firm j in quarter t and depreciation and amortization for firm j in quarter t. * p<0.1; ** p<0.05; *** p<0.01

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Leverage
Existing leverage may skew which firms extend debt maturity.

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of Economics)
Leverage

Rising costs of default
Trade-off with equity

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of Economics)
Leverage

Rising costs of default
Trade-off with equity
Partition sample into three groups based on pre-RegFD debt-to-assets
(leverage) and re-run panel regression.

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of Economics)
Leverage Results
Table: Dependent Variable: Short Debt-to-Total Debt by Leverage
Variables Low Medium High High-Low

RegFDt × Alwaysj -0.09 0.04 −0.05∗∗∗ 0.04
(.05) (.03) (.02)
RegFDt −1.31∗∗ 0.48 0.55∗∗ 1.89∗
(.68) (.80) (.26)
Alwaysj −0.39∗∗∗ −0.10∗∗ −0.38∗∗∗ 0.04
(.05) (.04) (.02)
N 11902 14353 13880
1 if firm pays a dividend in quarter, operating cashflow, a dummy variable that takes 1 after the Global Analyst Research
Settlement (GS), the book-to-market value, profitability which is the operating income before taxes divided by assets and
depreciation and amortization for firm j in quarter t. * p<0.1; ** p<0.05; *** p<0.01

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of Economics)
Size
Firm size strongly correlated with debt maturity

Large and Small firms have different degrees of complexity
Empirical work has found a nonlinear relationship between firm size and
debt maturity (Barclay and Smith 1995; Guedes and Opler 1996)
Partition sample into three groups based on firm size and re-rerun
panel regression.

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of Economics)
Size Results
Table: Dependent Variable: Short Debt-to-Total Debt by Size
Variables Small Medium Large High-Low
RegFDt × Alwaysj .067 .06 -.011 -0.078

(.072) (.07) (.025)
RegFDt .021 -.02 .050 .029
(.025) (.03) (.033)
Alwaysj −.426∗∗∗ −.20∗∗∗ −.531∗∗∗ -.105
(.076) (.06) (.055)
N 18198 13775 11602
1 if firm pays a dividend in quarter, operating cashflow, a dummy variable that takes 1 after the Global Analyst Research
Settlement (GS), the book-to-market value, profitability which is the operating income before taxes divided by assets and
depreciation and amortization for firm j in quarter t. * p<0.1; ** p<0.05; *** p<0.01

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of Economics)
Regulation SHO
Regulation SHO was a pilot program from January 3, 2005 to

Removed short-sale constraints from treated firms.
A subsample of my sample - 73 always covered and 90 never covered
- were randomly chosen to participate in the RegSHO

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Estimation Procedure
ShortDebtjt = α + β1 RegFDt + β2 Alwaysj + β3 RegFDt × Alwaysj

(3)
+β4 SHOt + Xjt γ 0 + δj + νt + εjt
ShortDebtjt = α + β1 RegFDt + β2 Alwaysj + β3 RegFDt × Alwaysj

(4)
+β4 SHOt + β5 SHOjt × Alwaysj + Xjt γ 0 + δj + νt + εjt
χ2 test of equality of coefficients

HO: β13 = β14 , β23 = β24 , β33 = β34 , β43 = β44
H1: At least one coefficient significantly differs

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of Economics)
Test of Robustness
Table: Short Debt-to-Total Debt with RegSHO - Full
(1) (2) (3) (4)

SHOjt × Alwaysj -.025 -.031
(.038) (.038)
SHOjt .054∗∗∗ .069∗∗ .054∗∗∗ .072∗∗
(.019) (.037) (.019) (.037)
RegFDt × Alwaysj −.058∗∗∗ −.057∗∗∗ −.055∗∗∗ −.054∗∗∗
(.016) (.016) (.017) (.017)
RegFDt .034 .034 .101 .104
(.058) (.058) (.438) (.437)
Alwaysj −.094∗∗∗ −.095∗∗∗ −.252∗∗∗ −.254∗∗∗
(.017) (.017) (.042) (.042)
χ2 0.42 0.69
p-value .9807 .9528

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of Economics)
Sketch of Model: Set-up
Following Bebchuk and Stole (1993):

Three Periods: 0, 1, 2
Firm Manager has a two period utility function:
U (V1 , V2 ) = V1 + V2 (5)
where Vi is the value of firm in period i=1,2.
Two projects:
1 S=
e S(K1 )
2 Lb = θL(K2 ) where θ ∼ U[θ, θ]

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of Economics)
Investor Side

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of Economics)
Conclusion
1 Unfollowed firms increase their short-term to total debt by 5

percentage points more than followed firms following the RegFD.
2 The effect is greatest for pre-RegFD low-leveraged firms but uniform
across firm size.
3 The differential between followed and unfollowed is robust to the
effect of the RegSHO

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of Economics)
Future Work
Complete model

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of Economics)
Future Work
Complete model
Model should demonstrate disclosure mechanism and information
gathering mechanism
Sensitivity tests for firms with coverage
Potential effect of coverage or analyst under/overreaction
Potentially consider firms that lose and gain coverage post-RegFD
Extend tests to consider different debt maturity lengths.

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of Economics)
Timeline
Pre-RegFD
Reg SHO
1994Q1 2000Q3/RegFD 2005Q1 2006Q4
RegFD: Enacted October 23, 2000. Prohibits selective disclosure of

material nonpublic information by corporations.
RegSHO: Pilot program from January 2005 to August 2007.
Method

Information
of Economics)
Gonzlez, Vctor M. ”The financial crisis and corporate debt maturity: The role of banking structure.” Journal of Corporate
finance 35 (2015): 310-328.
Quiet Bubble?
Information
of Economics)
Custodio, Claudia, Miguel A. Ferreira, and Luis Laureano. ”Why are US firms using more short-term debt?.” Journal of
Financial Economics 108, no. 1 (2013): 182-212.
Quiet Bubble?
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of Economics)
Parallel Trends - Excluding High-Tech
Parallel Trends

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Selected Debt Maturity
Parallel Trends
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of Economics)
Table: Short Debt-to-Total Debt with RegSHO - Full
(1) (2) (3) (4)

(.038) (.038)
SHOjt .054∗∗∗ .069∗∗ .054∗∗∗ .072∗∗
(.019) (.037) (.019) (.037)
RegFDt × Alwaysj −.058∗∗∗ −.057∗∗∗ −.055∗∗∗ −.054∗∗∗
(.016) (.016) (.017) (.017)
RegFDt .034 .034 .101 .104
(.058) (.058) (.438) (.437)
Alwaysj −.094∗∗∗ −.095∗∗∗ −.252∗∗∗ −.254∗∗∗
(.017) (.017) (.042) (.042)
χ2 0.42 0.69
p-value .9807 .9528

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of Economics)
Test of Robustness
Table: Short Debt-to-Total Debt with RegSHO-Subsample
(1) (2) (3) (4)

(.038) (.038)
SHOjt .054∗∗∗ .069∗∗ .054∗∗∗ .072∗∗
(.019) (.037) (.019) (.037)
RegFDt × Alwaysj −.058∗∗∗ −.057∗∗∗ −.055∗∗∗ −.054∗∗∗
(.016) (.016) (.017) (.017)
RegFDt −.263∗∗∗ .034 .101 .104
(.058) (.058) (.438) (.437)
Alwaysj .293∗∗∗ −.095∗∗∗ −.252∗∗∗ −.254∗∗∗
(.016) (.017) (.042) (.042)
χ2 0.42 0.69
p-value .9807 .9528

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Information Shocks and Debt Maturity

October 10, 2017

Daniel Jacobs (University of Houston Department

Can firm-level uncertainty have a macroeconomic effect?

Daniel Jacobs (University of Houston Department

Can firm-level uncertainty have a macroeconomic effect?

One possibility, a shock to information channels:

Daniel Jacobs (University of Houston Department

Can firm-level uncertainty have a macroeconomic effect?

One possibility, a shock to information channels:

As information channels change, investors’ valuation of firms can

Daniel Jacobs (University of Houston Department

Can firm-level uncertainty have a macroeconomic effect?

One possibility, a shock to information channels:

As information channels change, investors’ valuation of firms can

Could this affect aggregate corporate debt maturity?

Daniel Jacobs (University of Houston Department

Average US corporate debt maturity fell by 7% between 2008-2012.

Daniel Jacobs (University of Houston Department

Average US corporate debt maturity fell by 7% between 2008-2012.

Daniel Jacobs (University of Houston Department

Average US corporate debt maturity fell by 7% between 2008-2012.

Early 2000’s change in information disclosure regulation. Could this

International Debt US Maturity

Daniel Jacobs (University of Houston Department

Using the Regulation Fair Disclosure as a natural experiment, I find the

Effect does not significantly differ by firm-size

Differential effect appears to wane overtime

Robustness Check: Regulation SHO pilot removal of short-sales

Daniel Jacobs (University of Houston Department

Regulation Fair Disclosure: Effective October 23, 2000. Prohibits

Specifically, the regulation prevents management from using material

Notable exceptions: investment banks and credit rating agencies

Daniel Jacobs (University of Houston Department

Exploit Regulation Fair Disclosure’s (RegFD) prohibition on selective

Daniel Jacobs (University of Houston Department

Exploit Regulation Fair Disclosure’s (RegFD) prohibition on selective

Daniel Jacobs (University of Houston Department

Quarterly firm data from Compustat

Quarterly Sell-side security analyst coverage from Institutional

Daniel Jacobs (University of Houston Department

RegFDt a dummy variable that takes 1 after RegFD becomes

Alwaysj a dummy variable that takes the value of 1 if a firm is always

Set of time-varying controls associated with debt maturity: firm size,

Dummy variable that takes a value of 1 after Global Analyst Research

Daniel Jacobs (University of Houston Department

Short Debt: Debt of maturity under a year

Daniel Jacobs (University of Houston Department

Short Debt: Debt of maturity under a year

Daniel Jacobs (University of Houston Department

Table: Descriptive Statistics

Mean SD p25 p50 p75 N

Daniel Jacobs (University of Houston Department

Excluding High-Tech Selected Debt Maturity

ShortDebtjt = α + β1 RegFDt + β2 Alwaysj

where Xjt is a vector of time-varying firm-level controls, δj is firm-fixed

Daniel Jacobs (University of Houston Department

Table: Dependent Variable: Short-Term Debt to Total Debt

Daniel Jacobs (University of Houston Department

Existing leverage may skew which firms extend debt maturity.

Daniel Jacobs (University of Houston Department

Existing leverage may skew which firms extend debt maturity.

Daniel Jacobs (University of Houston Department