The Informational Role of Bond Analysts

This study exploits a large sample of sell-side bond analysts' reports to examine the effectiveness of bond analysts as information intermediaries in the U.S. corporate bond market. We document that the distribution of bond analysts' buy, hold, and sell recommendations is skewed positive. Bond analyst reports generate significant reactions in terms of bond trading volume and bond price changes. These reactions are robust to controls for other competing sources of information in the bond market such as rating agency disclosures (rating and outlook changes, watch list additions), equity analysts' reports, and earnings announcements. We also find some evidence consistent with bond analysts leading rating agency disclosures, particularly rating downgrades. Cross-sectional investigations of the effect of credit rating levels and of bond analysts' investment-banking affiliation on both bond analysts' recommendations and market reactions are consistent with fundamental differences between bond and equity capital markets. Overall, the evidence suggests that sell-side bond analysts provide relevant and timely information to bond investors, and hence play an active role in supporting the efficiency of the corporate bond market.