Are Credit Ratings Subjective? The Role of Credit Analysts in Determining Ratings
University of Texas at Austin
University of Melbourne; Financial Research Network (FIRN)
Geoffrey A. Tate
University of North Carolina Kenan-Flagler Business School
January 29, 2014
We show that the identity of the credit analysts covering a firm significantly affects the firm’s credit rating, comparing ratings for the same firm at the same time across agencies. Analyst biases carry through to spreads on firms’ outstanding debt and yields on new public debt issues. Firms covered by more pessimistic analysts issue less debt, lean more on cash and equity financing, and experience slower revenue growth. We also identify specific 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.
Number of Pages in PDF File: 66
Keywords: Credit Ratings, Credit Analysts, Credit Spread, Analyst Biases
JEL Classification: G24, G32, G02, G12working papers series
Date posted: March 11, 2013 ; Last revised: February 5, 2014
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