Sell-Side Debt Analysts and Debt Market Efficiency
Umit G. Gurun
University of Texas at Dallas - Naveen Jindal School of Management
University of Alabama at Birmingham - Department of Accounting and Information Systems
Southern Methodist University (SMU) - Edwin L. Cox School of Business
May 1, 2015
Forthcoming in Management Science
We explore sell-side debt analysts’ contributions to the efficiency of securities markets. We document that debt returns lag equity returns less when debt research coverage exists, consistent with debt analysts facilitating the process by which available information is impounded in debt prices. The effect is incremental to, but comparable in magnitude to, hedge fund ownership’s effect. No such effect exists for credit rating agencies. We also find that the dissemination of debt reports has an immediate effect on return volatility in both markets, consistent with debt analysts providing new information to securities markets. Increased return covariation suggests that this information impacts the pricing of debt and equity in the same direction. A large percentage of debt reports do not induce any immediate debt market return reaction but do induce an equity return reaction, consistent with new information being provided despite the absence of a debt market reaction. Finally, there is systematic variation in the debt market’s trading and return reactions to debt research. Timely reports and those by high-reputation brokers induce a quicker trading response, thus enhancing liquidity, while only timely reports induce a greater return response. This study illuminates the institutional underpinnings of debt market efficiency, and it has important implications for information content tests in the debt market, where trading is limited.
Number of Pages in PDF File: 48
Keywords: Financial analysts, Information, Equity markets, Debt markets, Market efficiency
JEL Classification: D53, G12, G14, G21, G24
Date posted: June 22, 2008 ; Last revised: August 25, 2015
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.343 seconds