Debt Analysts’ Views of Debt-Equity Conflicts of Interest

Abstract:     
We use a Naïve Bayesian computational linguistics procedure to code the tone of debt analysts’ discussions about events that potentially generate debt-equity conflicts of interest. Debt analysts’ views, as published in their investment reports, are expected to reflect the net effect of such conflict-events on the wealth of debt holders by taking into account the level of protection embedded in debt contracts. We document that debt analysts routinely discuss these conflict events and their interpretation is less negative when debt holders are protected by more restrictive covenants. We also provide evidence that debt analysts’ views on conflict events are positively related to their investment recommendations. More importantly, the tone of the event discussions explains the disagreement between debt and equity analysts’ recommendations, indicating the informational relevance to debt holders of these discussions. Finally, we document that bond trading volume and credit spread changes are increasing in debt analysts’ negative discussions of conflict events, after controlling for debt analysts’ recommendations. These latter results imply that debt investors value debt analysts’ guidance about the effect of conflict generating events on their wealth, beyond the standard investment
recommendation.

Number of Pages in PDF File: 58

Keywords: Debt Analysts, Investment Recommendation, Debt-Equity Conflicts of Interest, Bond Trading, Credit Default Swaps

JEL Classification: G12, G14, G32, M49

working papers series