The Role of Debt Analyst Reports for Firms in Financial Distress

Abstract

I examine the role of sell-side debt analyst reports in the corporate bond market for financially distressed firms. Debt analysts are not subject to the same conflict-of-interest regulations as equity analysts, and for this reason it is an open question whether the primary function of debt analysts lies in reducing information asymmetry between investors and firm managers in public debt markets or in marketing their investment bank and underwriting clients. I find that the majority of debt analyst reports (57.8%) piggyback on corporate news announcements (i.e., reiterate the information conveyed by other sources) and contain little new information, and the accuracy of the information in their reports is affected by investment banking conflicts of interest. While I find that debt analysts’ bankruptcy and covenant violation predictions are incrementally informative to corporate bond investors, such predictions constitute a small subset of the overall sample.

Keywords: Debt Analysts, Corporate Bond Market, Financial Distress, Piggybacking

JEL Classification: G12, G14, G24, G33, M41