The effects of sell-side debt research on debt and equity markets

We study the effects of sell-side debt research on price formation and investor behavior in debt and equity markets. Sell-side corporate debt research involves the production and dissemination of information by sell-side analysts to debt investors. Our sample includes 921 companies with publicly traded bonds and equity over the period from 2002 through 2004, with 429 of them being the subject of 2,758 debt research reports issued by 15 brokers. On debt report publication days, we document abnormally higher absolute returns and trading volume in both the bond and equity markets, as well as higher co-variation in debt and equity returns, controlling for the informational effects of earnings announcements, credit ratings changes and equity analyst reports. Second, we document that in the presence of sell-side debt research, debt returns incorporate public information relatively more quickly. The combined evidence suggests that sellside debt analysts (i) provide new information to debt and equity markets and (ii) speed up the information flow from the equity to the debt market. JEL Classification: G15, G21