Debt Analysts' Views of Debt-Equity Conflicts of Interest

investment recommendation. Relative to reports with positive or neutral discussions, reports that
include negative discussions increase the CDS spread by 16 basis points [3.1 basis points × 5
days] over the five-day window centered on the date of debt analysts’ reports. In terms of control
variables, not surprisingly, market changes in CDS spreads explain firm-specific changes in CDS
spreads, as evidenced by the positive and statistically significant coefficient on ΔCDS Market
Spread. Equity analysts’ buy recommendations are negatively associated with CDS spread
changes. The coefficients on the other control variables are not significant. An untabulated
F-statistic indicates that the rating fixed effects are jointly statistically significant.
In the following specifications, to better capture the idea of wealth transfers from debt to
equity holders, we focus on situations in which the news is negative for debt holders and positive
for equity holders. 26 We incorporate daily stock returns (Equity Return) into our specification
and restrict the sample to those observations in which news for equity holders is positive, as
proxied by daily stock returns greater than zero. We also interact the Conflict Discuss Neg and
Equity Return variables. The coefficient on the Equity Return variable captures days when debt
analysts’ conflict discussions are positive or neutral, or when there are no debt analysts’ reports.
We expect this coefficient to obtain a negative sign, capturing news about firms’ operating
fundamentals of the business that is common to debt and equity investors, such as earnings
announcements, other firm disclosures, and non-firm announcements. The predicted coefficient
is negative because CDS spreads move in the opposite direction to changes in debt holder
wealth. We expect that on days when debt analysts have negative views of conflict events,
greater gains to equity holders are associated with greater losses to debt holders. Hence we
predict a positive coefficient on the Conflict Discuss Neg × Equity Return interaction variable.
This specification is consistent with Alexander et al. (2000), who show that on days with no
26 We thank an anonymous reviewer for suggesting the incorporation of equity returns into the analyses.
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