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Sell-Side Debt Analysts and Debt Market Efficiency

Forthcoming in Management Science

48 Pages Posted: 22 Jun 2008 Last revised: 25 Aug 2015

Umit G. Gurun

University of Texas at Dallas

Rick Johnston

University of Alabama at Birmingham - Department of Accounting and Information Systems

Stanimir Markov

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: May 1, 2015

Abstract

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.

Keywords: Financial analysts, Information, Equity markets, Debt markets, Market efficiency

JEL Classification: D53, G12, G14, G21, G24

Suggested Citation

Gurun, Umit G. and Johnston, Rick and Markov, Stanimir, Sell-Side Debt Analysts and Debt Market Efficiency (May 1, 2015). Forthcoming in Management Science. Available at SSRN: https://ssrn.com/abstract=1148898 or http://dx.doi.org/10.2139/ssrn.1148898

Umit G. Gurun (Contact Author)

University of Texas at Dallas

2601 North Floyd Road
Richardson, TX 75083
United States

Rick M. Johnston

University of Alabama at Birmingham - Department of Accounting and Information Systems ( email )

Birmingham, AL 35294
United States

Stanimir Markov

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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