Debt Analysts' Views of Debt-Equity Conflicts of Interest

To control for other information, we include a variable that indicates whether conflict
events were announced by the firm in the six-month period prior to a bond’s issuance. 31 We also
add a control for equity analysts’ recommendations and include the Federal Funds rate at the date
of the bond’s issuance. By including this latter variable, we control for the effect of
macroeconomic changes on the firm’s cost of borrowing. To control for a borrower’s credit risk,
we include rating fixed effects. Finally, we include industry fixed effects which capture industry-
level characteristics, such as asset tangibility, that are likely to affect the offering yield.
The estimation of Equation (4) is presented in Column 1 of Table 8. The coefficient on
Conflict Discuss Neg Prior 6M is positive and significantly different from zero, suggesting that
negative conflict event discussions in debt analysts’ reports preceding a bond’s issuance lead to a
higher bond offering yield. Economically, a negative conflict-discussion tone prior to the bond
issuance (relative to neutral or positive discussions) increases the offering yield by 27 basis
points, which represents 4.0% of the median bond yield of the sample firms.
In Column 2 of Table 8, we examine whether the effect of conflict discussions on
offering yields depends on the bond’s credit riskiness. We find some evidence to support our
prediction that when debt is of low credit quality, debt yields are more sensitive to new
information. The coefficients on the conflict discuss measure are increasing as creditworthiness
declines, with the coefficient on Conflict Discuss Neg Prior 6M: BBB-A Rating significant at the
10% one-sided level and the coefficient on Conflict Discuss Neg Prior 6M: Below BBB Rating
significant at the 5% level. An untabulated test shows a significant difference in coefficients
between the medium (highest) credit risk category and the lowest one, with a p-value of 0.08
31 Compared to the Conflict Event Firm Announcement variable used in CDS and bond volume analyses in prior
sections, we omit dividend distributions from the variable’s definition. Almost all of our offering yield sample firms
distribute dividends in the six-month period prior to a new bond issuance (the period over which Conflict Event
Prior 6M is estimated for yield analysis). Hence if we include dividend distributions in our definition, the Conflict
Event Firm Announcement Prior 6M variable would have negligible variation.
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