Does Rating Analyst Subjectivity Affect Corporate Debt Pricing?

56 Pages Posted: 11 Mar 2013 Last revised: 2 Jul 2015

Cesare Fracassi

University of Texas at Austin

Stefan Petry

University of Manchester - Alliance Manchester Business School

Geoffrey A. Tate

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Date Written: June 30, 2015

Abstract

We find evidence of systematic optimism and pessimism among credit analysts, comparing contemporaneous ratings of the same firm across rating agencies. These differences in perspectives carry through to debt prices and negatively predict future changes in credit spreads, consistent with mispricing. Moreover, the pricing effects are the largest among firms that are the most opaque, likely exacerbating financing constraints. We find that MBAs provide higher quality ratings; however, optimism increases and accuracy decreases with tenure covering the firm. Our analysis demonstrates the role analysts play in shaping investor expectations and its effect on corporate debt markets.

Keywords: Analysts, Credit Ratings, Credit Spreads

JEL Classification: G24, G32, G02, G12

Suggested Citation

Fracassi, Cesare and Petry, Stefan and Tate, Geoffrey A., Does Rating Analyst Subjectivity Affect Corporate Debt Pricing? (June 30, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2230915 or http://dx.doi.org/10.2139/ssrn.2230915

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 Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Geoffrey A. Tate (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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