1 Introduction
2 Background
2.1 Related literature
2.2 The new form 8-K requirements
2.3 The syndicated loan market
3 Hypotheses, research design and sample
3.1 Hypothesis development
3.2 Test specification
3.2.1 Loan-level controls
3.2.2 Firm-level controls
3.3 Sample selection
Sample construction | Obs |
---|---|
Dealscan facilities matched with Compustat | 27,408 |
Less: | |
Missing CRSP monthly return or do not have any public disclosure in EDGAR in the year | (7,753) |
Missing loan spread | (1,957) |
Missing loan amount or maturity | (141) |
Facilities within 10 days before 10-K/10-Q | (2,397) |
Firms that never disclose loans in 8-K | (1,062) |
Manually checked wrong loans | (470) |
Total number of Facilities | 13,628 |
Detailed breakdown | |
Disclosed loans | |
Correctly classified | 10,868 |
Misclassified | 268 |
Total number of disclosed loans | 11,136 |
Undisclosed (hidden) loans | |
In 10-K/10-Q | 1,881 |
Not in 10-K/10-Q | 611 |
Total number of undisclosed (hidden) loans | 2,492 |
4 Empirical results
4.1 Descriptive statistics
Panel A: Descriptive statistics | ||||||||
---|---|---|---|---|---|---|---|---|
N | Mean | SD | p1 | p25 | p50 | p75 | p99 | |
Hidden Loan | 13,628 | 0.183 | 0.387 | 0.000 | 0.000 | 0.000 | 0.000 | 1.000 |
Hidden Loan (Ordered) | 13,628 | 0.228 | 0.515 | 0.000 | 0.000 | 0.000 | 0.000 | 2.000 |
Misclassified Loan | 13,628 | 0.020 | 0.139 | 0.000 | 0.000 | 0.000 | 0.000 | 1.000 |
Loan Spread | 13,628 | 2.132 | 1.374 | 0.200 | 1.250 | 1.750 | 2.750 | 7.500 |
Loan Amount ($M) | 13,628 | 535.0 | 837.6 | 5.0 | 100.0 | 250.0 | 600.0 | 4500.0 |
Maturity | 13,628 | 52.429 | 18.503 | 6.00 | 42.00 | 60.00 | 60.00 | 85.00 |
Loan to Asset | 13,600 | 0.192 | 0.219 | 0.002 | 0.055 | 0.122 | 0.249 | 1.131 |
Log Asset | 13,600 | 7.699 | 1.647 | 4.129 | 6.564 | 7.652 | 8.745 | 12.004 |
Equity Issue | 13,628 | 0.035 | 0.183 | 0.000 | 0.000 | 0.000 | 0.000 | 1.000 |
ROA | 13,587 | 0.009 | 0.028 | −0.123 | 0.002 | 0.010 | 0.019 | 0.082 |
Book Leverage | 13,600 | 0.322 | 0.219 | 0.000 | 0.157 | 0.302 | 0.458 | 0.960 |
Negative NI | 13,606 | 0.184 | 0.388 | 0.000 | 0.000 | 0.000 | 0.000 | 1.000 |
Z_Score | 13,241 | 2.128 | 2.810 | −2.000 | 0.709 | 1.471 | 2.625 | 16.105 |
Acquire Asset | 13,628 | 0.171 | 0.376 | 0.000 | 0.000 | 0.000 | 0.000 | 1.000 |
# of Analysts | 13,628 | 10.387 | 9.247 | 0.000 | 3.000 | 8.000 | 16.000 | 40.000 |
Volatility | 12,926 | 0.094 | 0.062 | 0.021 | 0.054 | 0.079 | 0.116 | 0.357 |
EDGAR Downloads | 13,155 | 270.90 | 292.95 | 2.000 | 89.000 | 190.50 | 345.00 | 1521.0 |
Big 4 | 13,628 | 0.069 | 0.073 | 0.011 | 0.029 | 0.043 | 0.080 | 0.386 |
Herfindal Index | 13,361 | 0.889 | 0.314 | 0.000 | 1.000 | 1.000 | 1.000 | 1.000 |
Panel B. Top 5 loan purposes |
Hidden | Disclosed | |||||||
Loan Purpose | N | Percent | Loan Purpose | N | Percent | |||
Corp. purposes | 1,585 | 63.55 | Corp. purposes | 6,365 | 57.17 | |||
Work. cap. | 240 | 9.62 | Work. cap. | 1,963 | 17.63 | |||
Takeover | 155 | 6.21 | Takeover | 1,163 | 10.45 | |||
Acquis. line | 123 | 4.93 | Acquis. line | 592 | 5.32 | |||
LBO | 118 | 4.73 | Debt Repay. | 397 | 3.57 | |||
Panel C. Comparison of loan characteristics | ||||||||
Hidden | Disclosed | |||||||
N | Mean | SD | N | Mean | SD | Difference | t−statistic | |
Loan Spread | 2,492 | 2.196 | 1.530 | 11,136 | 2.117 | 1.336 | 0.079 | 2.61*** |
Loan Amount ($M) | 2,492 | 576.479 | 952.111 | 11,136 | 525.665 | 809.527 | 50.815 | 2.74*** |
Maturity | 2,492 | 51.481 | 21.023 | 11,136 | 52.641 | 17.884 | −1.160 | −2.83*** |
Loan to Asset | 2,483 | 0.156 | 0.223 | 11,117 | 0.200 | 0.217 | −0.044 | −9.02*** |
4.2 Main results
Panel A: Full sample | ||||||
---|---|---|---|---|---|---|
Hidden Loan | Hidden Loan (Ordered) | |||||
(1) | (2) | (3) | (4) | (5) | (6) | |
Loan Spread | 0.0415*** | 0.0313*** | 0.0329*** | 0.0688*** | 0.0550*** | 0.0582*** |
(8.45) | (6.59) | (6.73) | (9.58) | (8.14) | (8.33) | |
Log Loan Amount | −0.0588*** | −0.0614*** | −0.0786*** | −0.0809*** | ||
(−12.70) | (−12.87) | (−11.92) | (−11.83) | |||
Log Maturity | −0.00993 | −0.00971 | −0.00533 | −0.00533 | ||
(−0.78) | (−0.77) | (−0.32) | (−0.32) | |||
Log Asset | 0.0455*** | 0.0480*** | ||||
(3.39) | (2.80) | |||||
Equity Issue | −0.0556* | −0.0722* | ||||
(−1.81) | (−1.82) | |||||
ROA | 0.0241 | 0.115 | ||||
(0.10) | (0.35) | |||||
Book Leverage | 0.0758 | 0.0867 | ||||
(1.39) | (1.24) | |||||
Loss | −0.0384** | −0.0538** | ||||
(−2.19) | (−2.40) | |||||
Z-Score | 0.00541 | 0.00681 | ||||
(1.59) | (1.61) | |||||
Constant | 0.166** | 1.363*** | 1.035*** | 0.147* | 1.715*** | 1.351*** |
(2.15) | (10.88) | (6.77) | (1.83) | (10.86) | (7.13) | |
Observations | 13,628 | 13,628 | 13,230 | 13,628 | 13,628 | 13,230 |
R-squared | 0.353 | 0.367 | 0.374 | 0.391 | 0.404 | 0.411 |
Year FE | YES | YES | YES | YES | YES | YES |
Borrower FE | YES | YES | YES | YES | YES | YES |
Loan Type FE | YES | YES | YES | YES | YES | YES |
Panel B: Subsample analysis | ||||||
Hidden Loan | Hidden Loan (ordered) | |||||
VARIABLES | (1) | (2) | (3) | (4) | (5) | (6) |
Loan-to-asset | ≥ 5% | < 5% | < 2.5% | ≥ 5% | < 5% | < 2.5% |
Loan Spread | 0.0212*** | 0.0445*** | 0.0703*** | 0.0359*** | 0.0987*** | 0.122*** |
(3.81) | (3.28) | (3.53) | (4.73) | (5.34) | (4.37) | |
Log Loan Amount | −0.0230*** | −0.0659*** | −0.0366* | −0.0218** | −0.0910*** | −0.0535 |
(−3.25) | (−5.12) | (−1.92) | (−2.24) | (−4.47) | (−1.63) | |
Log Maturity | −0.0176 | 0.00316 | −0.0431 | −0.0123 | −0.00328 | −0.0537 |
(−1.12) | (0.12) | (−1.00) | (−0.62) | (−0.08) | (−0.82) | |
Log Asset | 0.0205 | 0.00309 | −0.0948 | 0.0115 | 0.0146 | −0.109 |
(1.41) | (0.07) | (−1.42) | (0.63) | (0.25) | (−1.03) | |
Equity Issue | −0.0448 | −0.0848 | −0.0268 | −0.0608 | −0.0836 | 0.0317 |
(−1.41) | (−0.99) | (−0.24) | (−1.48) | (−0.72) | (0.18) | |
ROA | −0.208 | 0.289 | 0.932 | −0.164 | 0.0202 | −0.800 |
(−0.80) | (0.44) | (0.77) | (−0.52) | (0.02) | (−0.33) | |
Book Leverage | 0.0695 | 0.171 | 0.482 | 0.0996 | 0.103 | 0.225 |
(1.25) | (0.91) | (1.63) | (1.42) | (0.39) | (0.52) | |
Loss | −0.0345* | −0.0551 | −0.0802 | −0.0512** | −0.0698 | −0.108 |
(−1.85) | (−1.22) | (−1.12) | (−2.24) | (−1.12) | (−0.99) | |
Z-Score | 0.00402 | −0.0107 | 0.0297 | 0.00512 | −0.00801 | 0.0455 |
(1.12) | (−0.74) | (0.64) | (1.17) | (−0.40) | (0.64) | |
Constant | 0.495** | 2.356*** | 2.555*** | 0.494** | 2.824*** | 3.181*** |
(2.30) | (5.11) | (3.56) | (1.98) | (4.51) | (3.02) | |
Observations | 10,166 | 3,064 | 1,475 | 10,166 | 3,064 | 1,475 |
R-squared | 0.366 | 0.570 | 0.673 | 0.416 | 0.584 | 0.670 |
Year FE | YES | YES | YES | YES | YES | YES |
Borrower FE | YES | YES | YES | YES | YES | YES |
Loan Type FE | YES | YES | YES | YES | YES | YES |
Panel C: Loan spread and hidden loans - With Borrower × Loan type fixed effects | ||||||
Hidden Loan | Hidden Loan (Ordered) | |||||
(1) | (2) | (3) | (4) | (5) | (6) | |
Loan Spread | 0.0488*** | 0.0300*** | 0.0322*** | 0.0818*** | 0.0574*** | 0.0612*** |
(5.86) | (3.71) | (3.91) | (6.86) | (5.08) | (5.20) | |
Log Loan Amount | −0.0683*** | −0.0721*** | −0.0895*** | −0.0937*** | ||
(−10.28) | (−10.51) | (−9.62) | (−9.64) | |||
Log Maturity | −0.0326* | −0.0287 | −0.0189 | −0.0147 | ||
(−1.65) | (−1.46) | (−0.73) | (−0.57) | |||
Log Asset | 0.0534*** | 0.0558*** | ||||
(3.32) | (2.80) | |||||
Equity Issue | −0.0622* | −0.0782 | ||||
(−1.67) | (−1.63) | |||||
ROA | −0.225 | −0.282 | ||||
(−0.78) | (−0.78) | |||||
Book Leverage | 0.0865 | 0.0985 | ||||
(1.31) | (1.19) | |||||
Loss | −0.0485** | −0.0656** | ||||
(−2.33) | (−2.52) | |||||
Z-Score | 0.00730* | 0.00921* | ||||
(1.82) | (1.86) | |||||
Constant | 0.134*** | 1.582*** | 1.209*** | 0.110*** | 1.915*** | 1.526*** |
(5.63) | (11.27) | (7.11) | (3.58) | (9.99) | (6.85) | |
Observations | 13,628 | 13,628 | 13,230 | 13,628 | 13,628 | 13,230 |
R-squared | 0.515 | 0.527 | 0.534 | 0.570 | 0.581 | 0.587 |
Year FE | YES | YES | YES | YES | YES | YES |
Borrower-Loan type FE | YES | YES | YES | YES | YES | YES |
4.3 Misclassified loans
Misclassified | ||
---|---|---|
(1) | (2) | |
Loan Spread | 0.00630** | 0.00602** |
(2.32) | (2.22) | |
Log Loan Amount | −0.00117 | −0.00178 |
(−0.44) | (−0.64) | |
Log Maturity | −0.00371 | −0.00243 |
(−0.68) | (−0.44) | |
Log Asset | 0.00655 | |
(0.94) | ||
Equity Issue | −0.00411 | |
(−0.34) | ||
ROA | −0.277* | |
(−1.65) | ||
Book Leverage | 0.0170 | |
(0.59) | ||
Loss | −0.00991 | |
(−1.17) | ||
Z-Score | 0.00148 | |
(0.81) | ||
Constant | 0.0248 | −0.0218 |
(0.45) | (−0.30) | |
Observations | 11,136 | 10,840 |
R-squared | 0.448 | 0.462 |
Year FE | YES | YES |
Borrower FE | YES | YES |
Loan Type FE | YES | YES |
4.4 Cross-sectional tests – Firm auditor and industry competition
Hidden Loan | (1)–(2) z-value | Hidden Loan | (4)–(5) z-value | |||
---|---|---|---|---|---|---|
(1) | (2) | (4) | (5) | |||
Big 4 auditor | Non-Big 4 auditor | High competition | Low competition | |||
Loan Spread | 0.0329*** | 0.0350** | −0.14 | 0.0492*** | 0.0173** | 3.15*** |
(5.83) | (2.58) | (6.76) | (2.47) | |||
Log Loan Amount | −0.0663*** | −0.0196 | −3.15*** | −0.0644*** | −0.0533*** | −1.16 |
(−12.89) | (−1.40) | (−9.27) | (−8.04) | |||
Log Maturity | −0.00581 | −0.0531 | 1.07 | 0.00704 | −0.0207 | 1.08 |
(−0.43) | (−1.26) | (0.39) | (−1.13) | |||
Log Asset | 0.0400*** | 0.0392 | 0.02 | 0.00808 | 0.0679*** | −2.10** |
(2.71) | (0.85) | (0.38) | (3.54) | |||
Equity Issue | −0.0512 | −0.0441 | −0.07 | −0.0729* | −0.0435 | −0.47 |
(−1.56) | (−0.47) | (−1.66) | (−0.97) | |||
ROA | −0.0653 | 0.950 | −1.13 | 0.449 | −0.303 | 1.42 |
(−0.24) | (1.10) | (1.04) | (−0.99) | |||
Book Leverage | 0.104* | −0.0477 | 0.81 | 0.129 | 0.0698 | 0.52 |
(1.69) | (−0.27) | (1.50) | (0.93) | |||
Loss | −0.0472** | 0.0362 | −1.26 | −0.0213 | −0.0599** | 1.07 |
(−2.51) | (0.57) | (−0.82) | (−2.37) | |||
Z-Score | 0.00377 | 0.0138 | −0.93 | 0.00525 | 0.00798 | −0.38 |
(1.03) | (1.35) | (1.03) | (1.55) | |||
Constant | 1.165*** | 0.314 | 2.086*** | 0.605** | ||
(7.02) | (0.84) | (6.44) | (2.50) | |||
Observations | 11,532 | 1,438 | 6,613 | 6,617 | ||
R-squared | 0.376 | 0.488 | 0.412 | 0.387 | ||
Year FE | YES | YES | YES | YES | ||
Borrower FE | YES | YES | YES | YES | ||
Loan Type FE | YES | YES | YES | YES |
5 Additional drivers of nondisclosure
Hidden Loan | |||||
---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | |
Acquire Asset | −0.0299* | ||||
(−1.93) | |||||
# Analyst Following | −0.0041*** | ||||
(−3.18) | |||||
Log Downloads | −0.0199** | ||||
(−2.44) | |||||
Downloads > Median | −0.0381*** | ||||
(−3.11) | |||||
Volatility | −0.460*** | ||||
(−4.26) | |||||
Loan Spread | 0.0345*** | 0.0316*** | 0.0335*** | 0.0338*** | 0.0378*** |
(6.99) | (6.47) | (6.85) | (6.91) | (7.39) | |
Log Loan Amount | −0.0604*** | −0.0614*** | −0.0621*** | −0.0621*** | −0.0611*** |
(−12.63) | (−12.88) | (−12.89) | (−12.89) | (−12.62) | |
Log Maturity | −0.00930 | −0.0106 | −0.0113 | −0.0117 | −0.0124 |
(−0.74) | (−0.84) | (−0.89) | (−0.92) | (−0.96) | |
Observations | 13,230 | 13,230 | 13,066 | 13,066 | 12,875 |
R-squared | 0.374 | 0.375 | 0.376 | 0.377 | 0.380 |
Firm Level Controls | YES | YES | YES | YES | YES |
Year FE | YES | YES | YES | YES | YES |
Borrower FE | YES | YES | YES | YES | YES |
Loan Type FE | YES | YES | YES | YES | YES |
Panel A: Financial covenant types | ||||||||
Covenant types | Tight covenants | |||||||
Financial Covenants | # Loans | % Loans (#Loans ÷ 8,174) | # Tight | % Tight (#Tight ÷ 8,174) | % Loans w/ covenant (#Tight ÷ #Loans) | |||
Min. Interest Coverage | 3,375 | 41.29% | 74 | 0.91% | 2.19% | |||
Min. Cash Interest Coverage | 52 | 0.64% | 0 | 0.00% | 0.00% | |||
Min. Fixed Charge Coverage | 2,817 | 34.46% | 81 | 0.99% | 2.88% | |||
Min. Debt Service Coverage | 301 | 3.68% | 6 | 0.07% | 1.99% | |||
Max. Debt-to-EBITDA | 5,564 | 68.07% | 545 | 6.67% | 9.80% | |||
Max. Senior Debt-to-EBITDA | 704 | 8.61% | 59 | 0.72% | 8.38% | |||
Max. Leverage | 1,430 | 17.49% | 80 | 0.98% | 5.59% | |||
Max. Senior Leverage | 101 | 1.24% | 9 | 0.11% | 8.91% | |||
Max. Debt-to-Tangible Net Worth | 19 | 0.23% | 4 | 0.05% | 21.05% | |||
Max. Debt-to-Equity | 227 | 2.78% | 9 | 0.11% | 3.96% | |||
Min. Current Ratio | 285 | 3.49% | 24 | 0.29% | 8.42% | |||
Min. Quick Ratio | 57 | 0.70% | 2 | 0.02% | 3.51% | |||
Min. EBITDA | 444 | 5.43% | 20 | 0.24% | 4.50% | |||
Min. Net Worth | 737 | 9.02% | 35 | 0.43% | 4.75% | |||
Min. Tangible Net Worth | 695 | 8.50% | 77 | 0.94% | 11.08% | |||
Panel B: Covenants by hidden vs. disclosed loans | ||||||||
Hidden | Disclosed | Difference | t-statistic | |||||
N | Mean | SD | N | Mean | SD | |||
Average # Covenants | 820 | 2.009 | 0.883 | 7,354 | 2.052 | 0.807 | −0.044 | −1.46 |
Average # Tight Covenants | 820 | 0.167 | 0.408 | 7,354 | 0.122 | 0.364 | 0.045 | 3.32*** |
% Loans with at least 1 tight covenant | 820 | 0.154 | 0.361 | 7,354 | 0.110 | 0.312 | 0.044 | 3.77*** |
Panel C: Regression results | ||||||||
Hidden Loan | Hidden Loan (ordered) | |||||||
(1) | (2) | |||||||
# Tight Covenants | 0.0383* | 0.0561** | ||||||
(1.93) | (2.34) | |||||||
# Non-Tight Covenants | 0.0141 | 0.0214* | ||||||
(1.37) | (1.73) | |||||||
Loan Spread | 0.00882 | 0.0127* | ||||||
(1.55) | (1.86) | |||||||
Log Loan Amount | −0.0258*** | −0.0253*** | ||||||
(−4.97) | (−3.67) | |||||||
Log Maturity | −0.0166 | −0.0182 | ||||||
(−1.13) | (−1.00) | |||||||
Observations | 8,174 | 8,174 | ||||||
R-squared | 0.413 | 0.437 | ||||||
Firm Level Controls | YES | YES | ||||||
Year FE | YES | YES | ||||||
Borrower FE | YES | YES | ||||||
Loan Type FE | YES | YES |
6 Consequences of noncompliance
Total | Disclosed | Hidden | ||||
---|---|---|---|---|---|---|
Number of loans | 13,628 | 100% | 11,136 | 100% | 2,492 | 100% |
Firm received comment letters | 7,100 | 52% | 5,777 | 52% | 1,323 | 53% |
Received comment letters related to the loan | 74 | 1% | 73 | 1% | 1 | 1% |
Detailed Breakdown of the 74 comment letters | ||||||
Omitted the schedules and exhibits | 40 | 54% | ||||
Demand more details on the loan | 31 | 42% | ||||
Unsupportable statements | 1 | 1% | ||||
Revise the exhibit index | 1 | 1% | ||||
Fail to file an 8-K disclosure | 1 | 1% | ||||
Total | 74 | 100% |
Panel A: Equity market implications – Market returns following loan initiation | ||||||
Disclosed | Hidden | Disclosed – Hidden | ||||
N | Mean | N | Mean | Mean | t stat | |
Monthly Abnormal Return | ||||||
1st Month | 9,830 | 0.17% | 2,127 | 0.63% | −0.46% | −1.96** |
2nd Month | 9,830 | −0.27% | 2,127 | −0.15% | −0.12% | −0.55 |
3rd Month | 9,830 | 0.06% | 2,127 | −0.44% | 0.49% | 2.18** |
4th Month | 9,830 | −0.03% | 2,127 | 0.08% | −0.12% | −0.50 |
5th Month | 9,830 | −0.13% | 2,127 | 0.02% | −0.16% | −0.67 |
6th Month | 9,830 | 0.19% | 2,127 | 0.26% | −0.07% | −0.31 |
Buy-and-Hold Abnormal Return | ||||||
1st Month | 9,830 | 0.17% | 2,127 | 0.63% | −0.46% | −1.96** |
2nd Month | 9,830 | −0.10% | 2,127 | 0.37% | −0.47% | −1.49 |
3rd Month | 9,830 | 0.06% | 2,127 | 0.04% | 0.02% | 0.05 |
4th Month | 9,830 | 0.01% | 2,127 | 0.20% | 0.16% | −0.32 |
5th Month | 9,830 | −0.02% | 2,127 | 0.35% | 0.27% | −0.55 |
6th Month | 9,830 | 0.24% | 2,127 | 0.65% | 0.57% | −0.58 |
Panel B: Debt market implications – Future spreads | ||||||
Future Spread | ||||||
Hidden Loan indicator | Hidden Loan (Ordered) | |||||
(1) | (2) | (3) | (4) | |||
Hidden Loan | 0.1072* | 0.0454 | 0.1547*** | 0.1064** | ||
(1.82) | (0.73) | (2.87) | (2.00) | |||
Loan Spread | 0.1259*** | 0.1223*** | ||||
(2.77) | (2.75) | |||||
Log Loan Amount | −0.0583** | −0.0522** | ||||
(−2.20) | (−2.04) | |||||
Log Maturity | −0.0648 | −0.0653 | ||||
(−1.15) | (−1.16) | |||||
Constant | 1.9156*** | 3.6581*** | 1.8980*** | 3.5588*** | ||
(11.22) | (4.76) | (11.37) | (4.65) | |||
Observations | 3,966 | 3,842 | 3,966 | 3,842 | ||
R-squared | 0.806 | 0.815 | 0.807 | 0.816 | ||
Firm Level Controls | NO | YES | NO | YES | ||
Year FE | YES | YES | YES | YES | ||
Borrower FE | YES | YES | YES | YES | ||
Loan Type FE | YES | YES | YES | YES |