Debt Analysts' Views of Debt-Equity Conflicts of Interest
Debt Analysts' Views of Debt-Equity Conflicts of Interest
Debt Analysts' Views of Debt-Equity Conflicts of Interest
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timing <strong>of</strong> these events by performing Granger causality analyses. We estimate multivariate<br />
logistic models that predict rating downgrades and negative watchlist additions using lagged<br />
values <strong>of</strong> debt analysts’ negative discussions, negative rating agency actions and CDS spread<br />
changes as independent variables (see Beaver, Shakespeare, and Soliman (2006) and De Franco<br />
et al. (2009) for similar Granger causality analyses). We find that debt analysts’ negative conflict<br />
discussions significantly lead rating downgrades and negative watchlist additions up to two<br />
months prior to the month <strong>of</strong> the respective credit event. These untabulated tests also show that<br />
negative conflict discussions lead increases in CDS spreads. These results are consistent with the<br />
idea that debt analysts’ discussions anticipate the deterioration in credit quality that is associated<br />
with conflicts, which suggests that these discussions should be informative to debt market<br />
investors.<br />
4.3. Effect <strong>of</strong> debt analysts’ conflict discussions on their recommendations<br />
Before proceeding to our main tests, we investigate the effect <strong>of</strong> debt analysts’ conflict<br />
discussions on their recommendations. We expect that investment recommendations and their<br />
revisions should be affected, in part, by how debt analysts perceive the significance <strong>of</strong> the<br />
conflict events. These relations should provide some early evidence on the informativeness and<br />
importance <strong>of</strong> the tone <strong>of</strong> these discussions. More importantly, if debt analysts’ conflict<br />
discussions relate to concerns about debt holder wealth expropriation or asset substitution, then<br />
these discussions should also help to explain those occasions when debt analysts’<br />
recommendations disagree with those <strong>of</strong> equity analysts. We start by first estimating the<br />
following ordered probit model at the debt-analyst report level:<br />
<strong>Debt</strong> Recommendationit<br />
= 0 + 1 Conflict Discuss Negit + 2 Text Countit<br />
+ 3 Bond Characteristic Controlsit + 4 Other Information Controlsit<br />
+ Rating Effects + Year Effects + it. (1)<br />
<strong>Debt</strong> Recommendation is an ordered variable that equals one, two, or three if the debt analyst’s<br />
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