Debt Analysts' Views of Debt-Equity Conflicts of Interest

of debt analysts’ conflict discussions, we control for debt analysts’ recommendations and
recommendation changes.
We also control for bond characteristics that are likely to affect the magnitude of the
bond issuance yields, such as the number of covenants, maturity, and offering amount. As the
agency theory of covenants suggests that there is a trade-off between the number of covenant
restrictions and the interest rate (Smith and Warner, 1979), we expect the number of covenants to
be negatively related to the offering yield. Bonds with longer maturities are usually exposed to
greater interest and credit risks, and therefore are likely priced at higher yields. We do not have a
prediction regarding the sign of the association between a bond’s offering yield and the size of its
offering amount. On one hand, larger bond issues are typically more liquid and marketable and
thus should be priced at lower yields. On the other hand, larger bond issues imply a higher debt
burden for the borrower, and therefore may be associated with a higher probability of default.
We also include bond complexity in our specification, but again do not predict the sign of its
relation to offering yield. Complex bonds are more difficult to value and tend to be less liquid
(Harris and Piwowar, 2006; Edwards et al., 2007), suggesting that more complex bonds should
be priced at higher yields. In contrast, complex bonds have features such as put options, credit
enhancements, or sinking fund provisions that can lower the offering yield.
In addition, we control for firm characteristics that include size, leverage, and interest
coverage. Consistent with prior literature, we expect bond offering yields to increase with firm
leverage and decrease with firm size and interest coverage. Next, we add an indicator variable
that flags the existence of private bank debt at the bond’s issuance date. We predict a negative
association between the offering yield and private borrowings because we expect bank
monitoring to benefit bond holders (Datta, Iskandar-Datta, and Patel, 1999).
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