Do Credit Analysts Matter? The Effect of Analysts on Ratings, Prices, and Corporate Decisions
University of Texas at Austin
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
Geoffrey A. Tate
University of North Carolina Kenan-Flagler Business School
August 6, 2014
How do market prices become distorted? We find evidence of systematic optimism and pessimism among credit analysts, comparing credit ratings for the same firm at the same time across rating agencies. These biases carry through to spreads on firms’ outstanding debt and yields on new public debt issues. They also negatively predict future changes in credit spreads, consistent with mispricing. These inefficiencies in turn affect corporate policies: firms covered by more pessimistic analysts issue less debt, lean more on equity financing, and experience slower revenue growth. We also identify specific analyst traits that predict rating quality. MBAs provide less optimistic and more accurate ratings; however, optimism increases and accuracy decreases with tenure covering the firm, particularly among information-sensitive firms. Our analysis uncovers a novel mechanism through which debt prices become distorted and demonstrates its effect on real corporate decisions.
Number of Pages in PDF File: 53
Keywords: Market Inefficiencies, Analyst Biases, Credit Ratings, Corporate Policies
JEL Classification: G24, G32, G02, G12
Date posted: March 11, 2013 ; Last revised: August 8, 2014
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