Does In-House Debt Research Shape Equity Research?

Debt research places greater importance on cash flow analysis and credit rating prediction than does equity research and is only available to equity analysts employed by the same broker. We show that equity analysts with access to high quality debt research issue cash flow forecasts for financially distressed firms with higher frequency, accuracy, and price impact. In addition, these analysts are more likely to revise down their earnings forecasts, cash flow forecasts, and stock recommendations in the 90-day period leading to a credit rating downgrade; furthermore, these revisions are both larger and timelier than revisions by other analysts. We conclude that in-house debt research improves an equity analyst's ability to forecast cash flows and anticipate credit rating downgrades due to information sharing or orienting the equity analyst's attention to these forecasting tasks