The Informational Role of Bond Analysts


  • We have benefited from the comments of the Editor (Philip Berger), an anonymous reviewer, Ray Ball, John Core, Yonca Ertimur, Bob Holthausen, Ole-Kristian Hope, S.P. Kothari, Yanju Liu, Jeff Ng, Gil Sadka, Jayanthi Sunder, Dushyantkumar Vyas, and seminar participants at Columbia University, Hong Kong Science and Technology, London Business School, New York University, Singapore Management University, Tilburg University, the University of Chicago, the University of Pennsylvania, the University of Rochester, the AAA 2008 Annual Meeting, the AAA 2009 FARS meeting, and Tel Aviv conference. Richard Phelan, Head of European High Yield Research Team at Deutsche Bank, and Scott Richardson, Head of Credit Research at Barclays Global Investors, were particularly helpful in providing in-depth institutional knowledge of bond analysts. We thank the following research assistants, who helped us collect and code the bond analyst reports: Derek Carnegie, Lydia Guo, Yang Han, Jeffrey Lun, Viara Marinova, Samarth Modi, Vas Natarajan, Kunal Rai, Linda Tu, Zirong Wang, Yiyi Yang, and David Yiu. We gratefully acknowledge the financial support of the Rotman School of Management, University of Toronto, London Business School RAMD Fund, the University of Chicago Booth School of Business, and the Wharton School, University of Pennsylvania. We thank Moody's Investors Service for providing the historical database on ratings. Part of the work on this article was completed while Gus De Franco was a visiting faculty member at the Sloan School of Management, MIT, and Regina Wittenberg-Moerman was on the faculty at the Wharton School, University of Pennsylvania.


This study uses a large sample of sell-side bond analysts' reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities. First, we document that the distribution of bond analysts' buy, hold, and sell recommendations is skewed positively, but less so than the distribution of equity analysts' recommendations. The positive skewness in bond analysts' recommendations is greater for low than for high credit quality bonds. Second, we find that bond analysts' reports generate bond trading and return reactions that are both economically significant and greater for low credit quality bonds. The bond market reaction is greater for bond analysts' reports than for equity analysts' reports. Finally, while both bond and equity analysts lead rating agency announcements, we find no evidence of a difference in timeliness between bond and equity analysts' reports. Overall, our results are consistent with bond analysts issuing more negative reports than equity analysts and providing more information about low credit quality bonds as a result of the asymmetric demand for negative information by bond investors.