Abstract

http://ssrn.com/abstract=1970963
 
 

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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

August 18, 2014

AFA 2013 San Diego Meetings Paper

Abstract:     
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. We indeed find that a drop in analyst coverage due to these mergers leads to greater optimism-bias in credit ratings, especially for firms with little bond analyst coverage to begin with and for firms that are close to default. This coverage-induced shock leads to less informative ratings about future defaults and downgrades, and more subsequent bond security mispricings. Even though analysts do not directly compete with credit rating agencies, analyst reports about a firm’s equity nonetheless discipline what credit rating agencies can say about the firm’s debt.

Number of Pages in PDF File: 53

Keywords: credit rating agencies, rating bias, competition

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Date posted: December 12, 2011 ; Last revised: August 20, 2014

Suggested Citation

Fong, Kingsley Y. L. and Hong, Harrison G. and Kacperczyk, Marcin T. and Kubik, Jeffrey D., Do Security Analysts Discipline Credit Rating Agencies? (August 18, 2014). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1970963 or http://dx.doi.org/10.2139/ssrn.1970963

Contact Information

Kingsley Y. L. Fong
University of New South Wales - School of Banking and Finance ( email )
Sydney, NSW 2052
Australia
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Harrison G. Hong
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Marcin T. Kacperczyk (Contact Author)
Imperial College London - Accounting, Finance, and Macroeconomics ( email )
South Kensington campus
London SW7 2AZ
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jeffrey D. Kubik
Syracuse University - Department of Economics ( email )
426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-9063 (Phone)
315-443-1081 (Fax)
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