Florin Vasvari (London Business School)
"The Value of Debt Analysts’ Reports"
Using a large sample of sell-side debt analysts’ reports, we document that the issuance of these reports is triggered by a borrower’s earnings announcements and rating change news. In contrast, debt report issuance does not respond to changes in equity analysts’ recommendations. We also find that the quarterly number of debt reports increases with earnings surprises and the extent of trading in the secondary loan market, suggesting that analysts incorporate information in earnings announcements and loan trades which likely reflect private credit relevant information. The number of debt reports decreases if borrowing firms are rated by certified rating agencies or have greater equity analyst coverage, consistent with the interpretation that competing sources of information lower the informational value of debt analyst reports to bond investors. In line with these results, we show that the length of fixed-income analyst reports increases with the magnitude of the earnings surprise or when a rating change takes place but decreases with equity analyst coverage, the provision of managerial earnings guidance, or when the borrower covered is less risky. Finally, we document that more positive fixed-income analyst recommendations are associated with greater subsequent abnormal bond returns, highlighting the investment value of the reports. The recommendations predict bond returns especially when they follow negative earnings surprises, rating downgrades or trading in the secondary loan market. Overall, our evidence suggests that debt analysts play a critical role in interpreting credit information events thus supporting the information processing activities of bond investors.
Keywords: Debt reports; Earnings announcements, Rating changes; Debt recommendations, Abnormal bond returns
JEL Classifications: M41, G32, G34, G12