Debt Analysts' Views of Debt-Equity Conflicts of Interest

sinking fund provisions, etc.). Hence if, for example, analysts were to issue a negative view of a
conflict event, they may perceive these protective features as insufficient.
On one hand, because debt-equity conflicts have the potential to meaningfully affect debt
holders’ wealth, we expect debt holders to demand information on these events and for debt
analysts to meet this demand. If the potential conflict is material, whether or not it has been
anticipated, debt analysts are likely to monitor, analyze, and discuss its effect on the value of
outstanding debt securities in their reports. In particular, we expect conflict discussions to
distinguish debt analysts’ from equity analysts’ reports. If the contents of the former were limited
only to an analysis of a firm’s fundamentals, such as the level of EBITDA or earnings, the
distinction between equity and debt analysts’ reports would be blurred because we would expect
both types of analysts to monitor and evaluate the firm’s performance. Therefore, our prediction
is that the tone of debt analysts’ conflict discussions is relevant for debt investors and generates
debt market reactions. Given the payoff function of debt securities, which are fixed claims
against the borrowing firm and have limited upside potential, we expect debt holders to have an
asymmetric demand for negative information. As a result, we predict that debt market reactions
will be stronger if debt analysts have negative views about conflict events. Empirically, we
measure debt market reactions by changes in secondary market CDS spreads and bond trading
volume and by the level of bonds’ yield to maturity on new bond issues in the primary market.
Our primary market setting reinforces the economic importance of conflict discussions because
yields on new issues represent real effects on a company’s cost of debt financing.
On the other hand, the extent and economic importance of such conflicts to debt holders, as
documented by extant studies, is far from clear. Parrino and Weisbach (1999), discussed above,
is one example. In the case of spin-offs, Hite and Owers (1983) and Schipper and Smith (1983)
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