Abstract

http://ssrn.com/abstract=1756945
 
 

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Credit Rating Agency and Equity Analysts' Adjustments to GAAP Earnings


George E. Batta


Claremont McKenna College - Robert Day School of Economics and Finance

Volkan Muslu


Bauer College of Business University of Houston

June 4, 2013


Abstract:     
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, G17

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Date posted: February 8, 2011 ; Last revised: June 27, 2013

Suggested Citation

Batta, George E. and Muslu, Volkan, Credit Rating Agency and Equity Analysts' Adjustments to GAAP Earnings (June 4, 2013). Available at SSRN: http://ssrn.com/abstract=1756945 or http://dx.doi.org/10.2139/ssrn.1756945

Contact Information

George E. Batta (Contact Author)
Claremont McKenna College - Robert Day School of Economics and Finance ( email )
500 E. Ninth Street
Claremont, CA 91711
United States
Volkan Muslu
Bauer College of Business University of Houston ( email )
Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States
713 7434924 (Phone)
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