Credit Rating Agency and Equity Analysts' Adjustments to GAAP Earnings
George E. Batta
Claremont McKenna College - Robert Day School of Economics and Finance
Bauer College of Business University of Houston
June 4, 2013
Moody’s analysts’ adjusted earnings are significantly lower than those of sell-side equity analysts, consistent with Moody’s greater focus on downside risk of companies. Moody’s analysts’ adjusted earnings are lower when companies exhibit higher downside risk, as measured by volatility in negative market returns, volatility in negative idiosyncratic stock returns, poor accounting performance, and high leverage. Furthermore, Moody’s analysts’ adjusted earnings better predict future bankruptcies than earnings of equity analysts. All findings are robust to controlling for potential optimism incentives of Moody’s analysts and equity analysts, rating levels, and year and industry fixed effects. Our findings suggest that credit rating agencies cater to their clients’ need for a more conservative interpretation of GAAP financial statements, relative to equity analysts.
Number of Pages in PDF File: 42
Keywords: Credit rating agencies, analysts, street earnings, conservatism
JEL Classification: G24, G17working papers series
Date posted: February 8, 2011 ; Last revised: June 27, 2013
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