Debt Analysts' Views of Debt-Equity Conflicts of Interest

incremental to the effect of their recommendations, we include both the levels and changes in
debt analysts’ recommendations.
To control for other information, we include systematic market movements in CDS
prices, estimated by the variable ΔCDS Market Spread. This variable equals the change in the
average daily CDS spread change of all entities with the same credit rating category. We also
incorporate into our analysis controls for the disclosures of other major information sources,
which should assist with the objective of controlling for changes in operating fundamentals. We
include dummy variables that indicate whether equity analysts have issued a buy or sell
recommendation. The specification also includes a dummy variable that indicates a negative
rating agency action, such as a negative rating change, negative watch list addition, or a negative
outlook change (Rating Agency Action Neg). 25 Rating agencies are established as important
information providers in the bond market. Following Reg FD, certified rating agencies continue
to have access to private information from management, as these agencies are exempt from the
regulation, and therefore may have access to information that is not available to debt analysts.
However, because ratings are used for contracting, rating agencies prefer ratings stability, which
may lead to less timely information production (Beaver et al., 2006). Last, we control for
whether a firm announces negative earnings.
The results of estimating equation 2 are presented in column (1) of Table 6. The coefficient
on Conflict Discuss Neg is positive as expected, consistent with debt analysts’ negative conflict
discussions predicting a deterioration in an issuer’s creditworthiness beyond the standard
25 Throughout our empirical analyses we often combine multiple events into a single variable for parsimony.
Untabulated analysis indicates that our results do not change when we instead incorporate multiple indicator
variables, one for each event. For example, in the case of negative rating agency actions, our inferences are robust to
the inclusion of not one but three indicator variables, each reflecting the different types of rating actions: negative
rating change, negative watch list addition, or a negative outlook change. Besides Rating Agency Action, another
variable that appears in our analyses below and represents multiple events is Conflict Event Firm Announcement.
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