Debt Analysts' Views of Debt-Equity Conflicts of Interest

as well as information that leads to a divergence of opinions among investors (e.g., Harris and
Raviv, 1993; Kim and Verrecchia, 1994). 23 If debt analysts’ reports matter to debt investors, then
they should generate additional trading.
4.4.1. Daily CDS spread changes. The empirical analysis presented in Table 6 includes
observations for all trading days during the six-year period we study for which we have CDS
spread data available for each of the sample firms. Within this framework, we have the flexibility
to control for all firm, analyst, rating agency and macro-economic disclosures in the same test.
Therefore, this approach should allow us to better estimate the true relationships between debt
market reactions and information events. Using the full sample of days also allows for the
comparison of the magnitude of the CDS spread change reactions across different information
events. For each event, we assign the news to the announcement day, and to each of the two
trading days immediately before and after it (i.e., we use a five-day event window). 24 To test
whether the CDS market reacts to debt analysts’ conflict discussions, we estimate:
ΔCDS Spreadit = 0 + 1 Conflict Discuss Negit + 2 Debt Report Controlsit
+ 3 Other Information Controlsit + Rating Effects + it. (2)
ΔCDS Spread is the daily change in the CDS spread. Increases in CDS spreads indicate
deterioration in an issuer’s credit quality. We expect the Conflict Discuss Neg coefficient to be
positive, indicating that negative conflict discussions will increase CDS spreads. As we are
interested in examining the effect of debt analysts’ conflict discussions on CDS spreads
23 Note also that Cready and Hurtt (2002) study the differential ability of equity volume and equity price return
metrics to assess the equity investor response to information events. They find that volume-based metrics provide
more powerful tests of investor response than do return-based metrics.
24 We use a 5-day window because it is difficult to precisely identify when the information in the debt analysts’
reports is released to debt investors. For example, it is possible that a summary of the news contained in the report is
issued to clients a day or two before the formal publication date. As another example, if the report is issued at the
end of the business day, it could be released to clients the following day. It is also possible that reports issued at the
end of a trading day generate trading responses in the days that follow. The bond market is an over-the-counter
market and the low liquidity of some bonds could lead to the passage of a day or two before a counterparty to trade
can be found. In addition, De Franco et al. (2009) show that the market reaction to a debt analyst’s report is spread
over the five days centered on the day of the report. (Other examples of debt market and analyst-related papers that
use five-day windows in their analysis include Hand et al. (1992), Asquith et al. (2005), and Bonner et al. (2007)).
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