Does Rating Analyst Subjectivity Affect Corporate Debt Pricing?
University of Texas at Austin
Frankfurt School of Finance & Management gemeinnützige GmbH
Geoffrey A. Tate
University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)
June 30, 2015
Journal of Financial Economics (JFE), Forthcoming
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.
Number of Pages in PDF File: 56
Keywords: Analysts, Credit Ratings, Credit Spreads
JEL Classification: G24, G32, G02, G12
Date posted: March 11, 2013 ; Last revised: July 2, 2015