The Information Value of Credit Rating Action Reports: A Textual Analysis

Management Science, 2016, Vol 62 (8), 2218-2240

50 Pages Posted: 23 Jul 2013 Last revised: 4 Jan 2017

Sumit Agarwal

National University of Singapore

Vincent Y. S. Chen

National University of Singapore

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

Date Written: January 1, 2016

Abstract

We examine if Standard & Poor’s (S&P) credit rating action reports contain new default-related information beyond credit rating actions such as rating changes, Credit Watch and Outlook. We find that the net linguistic tone (negative minus positive tone) in the reports is significantly and negatively related to abnormal returns and predicts future rating changes. We discover that the provision of tone does not seem to be inflated by the conventional proxies of conflict of interest faced by S&P as higher conflict of interest is related to more negative net tone. Moreover, the tone can predict future rating changes even when conflict of interest is high. Overall, our study reveals novel evidence on the information value of credit rating action reports.

Keywords: Credit Ratings; Credit Rating Agencies; Credit Rating Reports; Linguistic Tone

JEL Classification: G2, G24

Suggested Citation

Agarwal, Sumit and Chen, Vincent Y. S. and Zhang, Weina, The Information Value of Credit Rating Action Reports: A Textual Analysis (January 1, 2016). Management Science, 2016, Vol 62 (8), 2218-2240. Available at SSRN: https://ssrn.com/abstract=2297138 or http://dx.doi.org/10.2139/ssrn.2297138

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Vincent Y. S. Chen

National University of Singapore ( email )

15 Kent Ridge Drive
NUS Business School
Singapore, 119245
Singapore

Weina Zhang (Contact Author)

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

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