Geographic Location of the Firm and Credit Rating Accuracy

47 Pages Posted: 23 Apr 2013 Last revised: 22 Oct 2018

See all articles by Bikki Jaggi

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Leo Tang

Lehigh University

Date Written: April 30, 2015

Abstract

We document in this study that lack of soft information as a result of longer distance between the firm and rating agency headquarters leads to higher errors in bond ratings, reflected by Type-1 and Type-2 errors for missed defaults and false warnings, respectively. Our results show that for each 100 kilometers in terms of the distance between a firm’s and the rating agency headquarters, the likelihood of missed defaults (Type-1 error) increases by 4.9 percent and false warnings (Type-2 error) increases by 2.1 percent. Additionally, our analyses show that the downgrades are less timely for firms that are further away from the rating agency headquarters. The results also show that missed defaults are especially higher and timeliness of downgrades is lower for firms with higher complexity, lower analyst following, and lower accessibility to the rating agency headquarters. Though analysts adjust their ratings lower when soft information is lacking as a result of longer distance, their adjustments do not fully compensate for the lack of soft information.

Keywords: Geography, Proximity, Soft Information, Credit Rating

JEL Classification: G12, G24, G32, M21

Suggested Citation

Jaggi, Bikki and Tang, Leo, Geographic Location of the Firm and Credit Rating Accuracy (April 30, 2015). Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2255089 or http://dx.doi.org/10.2139/ssrn.2255089

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100B Rockafeller Road
Piscataway, NJ 08854
United States

Leo Tang (Contact Author)

Lehigh University ( email )

621 Taylor St
Bethlehem, PA 18015
United States

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