Abstract

http://ssrn.com/abstract=2230915
 
 

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Do Credit Analysts Matter? The Effect of Analysts on Ratings, Prices, and Corporate Decisions


Cesare Fracassi


University of Texas at Austin

Stefan Petry


University of Melbourne; Financial Research Network (FIRN)

Geoffrey A. Tate


University of North Carolina Kenan-Flagler Business School

August 6, 2014


Abstract:     
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

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Date posted: March 11, 2013 ; Last revised: August 8, 2014

Suggested Citation

Fracassi, Cesare and Petry, Stefan and Tate, Geoffrey A., Do Credit Analysts Matter? The Effect of Analysts on Ratings, Prices, and Corporate Decisions (August 6, 2014). Available at SSRN: http://ssrn.com/abstract=2230915 or http://dx.doi.org/10.2139/ssrn.2230915

Contact Information

Cesare Fracassi
University of Texas at Austin ( email )
Red McCombs School of Business
1 University Station B660
Austin, TX 78712
United States
Stefan Petry
University of Melbourne ( email )
The Department of Finance
Faculty of Business & Economics
Melbourne, Victoria 3010
Australia
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Geoffrey A. Tate (Contact Author)
University of North Carolina Kenan-Flagler Business School ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States

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