Debt Analysts' Views of Debt-Equity Conflicts of Interest

Conflict Discuss Neg: Above A Rating, equals one if debts analysts’ conflict discussion is
negative and the firm’s senior debt rating is above A. Similarly, Conflict Discuss Neg: BBB-A
Rating and Conflict Discuss Neg: Below BBB Rating equal one if debts analysts’ conflict
discussion is negative and the firm’s senior debt rating ranges from BBB to A and is below BBB,
respectively, and zero otherwise. We then interact these three variables with Equity Return. 28 The
results are presented in column (3) of Table 6. As expected, we find that the coefficients are
increasing as creditworthiness declines. An untabulated test indicates that the difference in
coefficients between the highest and lowest credit risk categories is statistically significant (p-
value = 0.07), but the difference between the medium and low risk categories is not significant
(p-value = 0.15). These findings provide some support to our cross-sectional prediction that the
news provided by debt analysts’ conflict discussions is more valuable for lower rated debt.
4.4.2. Daily bond trading volume. Similar to the empirical analyses of CDS spread
changes, we use a panel data of observations for all trading days during our six-year period for
each of the sample firms and test whether bond trading reacts to debt analysts’ discussions of
conflict events. For each event we assign the news to a five-trading-day event window and
estimate the following model:
Bond Volumeit= 0 + 1 Conflict Discuss Negit + 2 Debt Report Controlsit
+ 3 Other Information Controlsit + Rating Effects + Year Effects + it. (3)
Bond Volume is the dollar volume of principal traded on a given day, scaled by the size of the
bond on the issue date, averaged over all the firm’s bonds. We control for the existence of a debt
analysts’ report, and whether the report contains a conflict discussion, so that we can focus our
interpretation on the effect of negative versus positive or neutral discussions. We also control for
28 As we are interested in examining the effect of conflict discussions as a function of the creditworthiness of the
firm, we omit rating fixed effects from this specification. (The same holds for the volume and offering yield
analyses, when we conduct similarly motivated cross-sectional tests.)
31