Are Unsolicited Ratings Biased? Evidence from Long-Run Stock Performance

40 Pages Posted: 9 Mar 2014

See all articles by Soku Byoun

Soku Byoun

Baylor University

Jon A. Fulkerson

University of Dayton

Seung Hun Han

Korea Advanced Institute of Science and Technology (KAIST) - Department of Management Science

Yoon S. Shin

Loyola University Maryland

Date Written: March 8, 2014

Abstract

We test the biasedness of unsolicited ratings relative to solicited ratings using the ex post firm performance measured by the long-run stock performance of firms following rating announcements and changes. We find that the announcements of new unsolicited ratings are followed by negative long-run stock performance, while those of new solicited ratings are followed by insignificant long-run stock performance. These results are inconsistent with the conservatism hypothesis that suggests that unsolicited ratings are downward biased. We further demonstrate that firms with solicited upgraded (downgraded) ratings experience subsequent positive (negative) abnormal stock performance, while those with unsolicited rating changes have zero abnormal stock performance. The differential stock performance following rating changes between solicited and unsolicited ratings reflect the differential information carried by each type of rating rather than the biasedness in ratings. Specifically, while solicited ratings are based on both public and private information, unsolicited ratings are mainly based on public information. Overall, we find no evidence for a downward bias in unsolicited ratings.

Keywords: Credit Ratings; Unsolicited Ratings; Long-Run Returns

JEL Classification: G10; G14; G15

Suggested Citation

Byoun, Soku and Fulkerson, Jon A. and Han, Seung Hun and Shin, Yoon S., Are Unsolicited Ratings Biased? Evidence from Long-Run Stock Performance (March 8, 2014). Journal of Banking and Finance, Vol. 42, 2014. Available at SSRN: https://ssrn.com/abstract=2406394

Soku Byoun

Baylor University ( email )

Department of Finance Insurance & Real Estate
P.O.Box 98004
Waco, TX 76712
254-710-7849 (Phone)

Jon A. Fulkerson

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Seung Hun Han

Korea Advanced Institute of Science and Technology (KAIST) - Department of Management Science ( email )

291 Daehak-ro(373-1 Guseong-dong), Yuseong-gu
Daejeon, 305-701
Korea, Republic of (South Korea)

Yoon S. Shin (Contact Author)

Loyola University Maryland ( email )

Department of Finance
Baltimore, MD 21210
United States

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