Debt Analysts' Views of Debt-Equity Conflicts of Interest

conflict events (with conflict events), positive equity returns are associated with an increase
(decrease) in bond prices.
Column (2) of Table 6 shows the results of this specification. As predicted, the
coefficient on Equity Return is negative and statistically significant, consistent with both equity
returns and CDS spread changes capturing news about operating fundamentals. It is also
consistent with the evidence in Collin-Dufresne et al. (2001) and Hotchkiss and Ronen (2002),
who document modest comovement between bond and equity market returns. As expected, the
coefficient on the Conflict Discuss Neg × Equity Return interaction variable is positive and
statistically significant, which is consistent with a wealth transfer from debt to equity holders
when analysts provide negative discussions of conflict events. The results for the control
variables are generally similar to the results in Column 1. The exception is that both there and in
the last column, the coefficient on Debt Report Upgrade (Downgrade) is negative (positive) and
statistically significant, which indicates that a positive (negative) recommendation change is
associated with an improvement (deterioration) in credit quality. Also, equity buy
recommendations are no longer significant. 27
We next examine how this result changes as a function of the creditworthiness of the
firm. We define three new conflict discussion indicator variables based on the credit rating
category of the firm: Above A rating, BBB-A rating, and below BBB rating. The first variable,
27 In untabulated analyses, we conduct the following alternative CDS-reaction test. We examine whether the
analysts’ view of conflict events explains changes in CDS spreads around debt analysts’ reports that contain a
discussion of conflict events. In these tests, each observation corresponds to a debt analyst’s report that contains a
discussion of conflict events. We regress the change in the CDS spread over the event window around debt analysts’
reports on Conflict Discuss and controls for the change in the market CDS spread and characteristics of bond and
equity analysts’ recommendations. In addition, in this regression we control for whether a firm is on a negative
watchlist, as debt investors are likely to be more sensitive to negative conflict discussions when a decrease in a
firm’s credit quality is expected. We find a significant increase in the CDS spread when debt analysts’ reports
include negative discussions of conflict events, particularly when equity returns over the same event window are
positive. These results provide further support for the notion that investors’ reaction to debt analysts’ reports is more
pronounced when debt analysts view conflict events negatively.
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