Do Security Analysts Discipline Credit Rating Agencies?
Kingsley Y. L. Fong
University of New South Wales - School of Banking and Finance; Financial Research Network (FIRN)
Harrison G. Hong
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
Marcin T. Kacperczyk
Imperial College London - Accounting, Finance, and Macroeconomics; National Bureau of Economic Research (NBER)
Jeffrey D. Kubik
Syracuse University - Department of Economics
December 15, 2013
AFA 2013 San Diego Meetings Paper
Earlier work exploiting brokerage house mergers identified that security analyst coverage leads to more competitive and less optimistically biased earnings forecasts. Since the earnings forecasts for a firm’s equity enter directly into the credit ratings of a firm’s debt, we test the hypothesis that security analyst coverage also disciplines credit rating agencies. Using a variety of measures of optimism-bias in credit ratings, we indeed find that a drop in analyst coverage due to brokerage house mergers leads to greater credit ratings bias. This effect is stronger for firms with little bond analyst coverage to begin with and for firms that are close to default. So even though analysts do not directly compete with credit rating agencies, competitive analyst reports and a more objective consensus forecast about a firm’s equity nonetheless disciplines what credit rating agencies can say about the firm’s debt.
Number of Pages in PDF File: 47
Keywords: credit rating agencies, rating bias, competitionworking papers series
Date posted: December 12, 2011 ; Last revised: December 15, 2013
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