Debt Analysts' Views of Debt-Equity Conflicts of Interest

investors are more sensitive to news.
To provide additional evidence that debt analysts’ conflict discussions capture the construct
of conflict between debt and equity holders, we develop and test an alternative measure of the
tone of these discussions. This measure is based on the disagreement in the tone of conflict
discussions between debt and equity analyst reports, which may more directly capture the idea of
conflict between debt and equity investors. We construct a firm-matched sample of equity
analysts’ reports that are issued prior to the debt analyst’s report. As in the case of debt analysts’
reports, we extract equity analysts’ discussions of conflict events from these reports and measure
the discussions’ tone using the Naïve-Bayesian model. We then create an alternative hybrid
measure of debt analysts’ conflict discussions, by focusing on debt analysts’ reports that contain
negative conflict discussions when equity analysts’ conflict discussions are positive.
Using this alternative measure, we continue to find strong CDS credit spread and bond
volume reactions to debt analysts’ negative conflict discussions, further supporting our
conjecture that debt analysts’ reports are more informative if the tone of the discussions is
negative. Bond offering yields are also significantly higher when conflict events are viewed
negatively by debt analysts but positively by equity analysts, confirming that debt analysts’
conflict discussions are informative with respect to the initial pricing of bond securities in the
primary market.
Our study contributes to the literature across several dimensions. First, we contribute to
research on the role of information intermediaries such as analysts, rating agencies, and the press
in shaping firms’ information environments. 2 We provide unique evidence showing that the tone
2 See, for example, studies by: Brennan, Jegadeesh, and Swaminathan (1993), Brennan and Subrahmanyam (1995),
Frankel, Kothari and Weber (2006), Ederington and Goh (1998), Hand, Holthausen, and Leftwich (1992), Dichev
and Piotroski (2001), Jorion, Liu and Shi (2005), Beaver et al. (2006), Fang and Peress (2009), Bushee et al. (2010),
and Soltes (2010).
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