Where the Heart Is: Information Production and the Home Bias
61 Pages Posted: 3 Nov 2014 Last revised: 14 Mar 2017
Date Written: March 13, 2017
This paper shows that home bias exists among information producers and has real economic effects. Credit analysts who rate issuers in their home states are more generous than benchmark analysts who grew up in other states. This effect strengthens around key rating certifications (AAA and investment grade), reduces credit spreads, and expands affected issuers’ debt capacity. Because this effect is driven by where analysts grew up, not by where they produce ratings, we conclude that our results reflect home bias rather than superior information. Tests of timeliness and symmetry in rating updates by home and outside analysts further support this conclusion. We also find that analysts’ early life experiences influence the magnitude of the home bias.
Keywords: Credit Ratings, Home Bias, Municipal Debt, Information Production, Capital Markets Regulation
JEL Classification: G24, G28, H70, H71, H72, H74
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