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

December 2014


Abstract:     
Moody’s analysts and sell-side equity analysts adjust GAAP earnings as part of their research. We show that adjusted earnings definitions of Moody’s analysts are significantly lower than those of equity analysts when companies exhibit higher downside risk, as measured by volatility in idiosyncratic stock returns, volatility in negative market returns, poor earnings, and loss status. Relative to adjusted earnings definitions of equity analysts, adjusted earnings definitions of Moody’s analysts better predict future bankruptcies, yet they fare significantly worse in predicting future earnings and operating cash flows. These findings persist after controlling for optimism incentives of analysts, reporting incentives of companies, credit rating levels, and industry and year effects. Our findings suggest that credit rating agencies cater to their clients’ need for a more conservative interpretation of company-reported performance than what is offered by equity analysts.

Number of Pages in PDF File: 47

Keywords: Credit rating agencies, analysts, street earnings, conservatism

JEL Classification: G24


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Date posted: February 8, 2011 ; Last revised: February 12, 2015

Suggested Citation

Batta, George E. and Muslu, Volkan, Credit Rating Agency and Equity Analysts' Adjustments to GAAP Earnings (December 2014). 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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