Rating Agency Adjustments to GAAP Financial Statements and Their Effect on Ratings and Credit Spreads
New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Accounting, Taxation & Business Law
October 7, 2012
AAA 2009 Financial Accounting and Reporting Section (FARS) Paper
Using a new dataset of U.S. GAAP and adjusted financial statements, I document that Moody's, a major rating agency, extensively modifies reported financial statements. The major quantitative adjustment incorporates off-balance-sheet financing activity (operating leases and securitizations), causing the adjusted leverage ratio for the median firm to increase by 19%. Assessments of off-balance-sheet debt and assessments of qualitative factors ("soft adjustments'') are significantly associated with lower ratings and higher CDS spreads. The relation is more pronounced for shorter CDS maturities. Thus ratings can serve as a contracting device to incorporate off-balance-sheet debt adjustments and credit-risk increasing soft factors. Firms with greater opacity in their financial statements (measured by greater degree of absolute adjustments) exhibit greater rating dispersion and likelihood of triggering a rating change.
Number of Pages in PDF File: 47
Keywords: Rating agencies, off-balance sheet finance, corporate credit risk
JEL Classification: G33, G32, G10, D82working papers series
Date posted: September 11, 2008 ; Last revised: November 6, 2012
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