Analyst Promotions within Credit Rating Agencies: Accuracy or Bias?

Abstract

We infer Moody’s preference for accurate versus biased ratings using hand-collected data on the internal labor market outcomes of its analysts. We find that accurate analysts are more likely to be promoted and less likely to depart. The opposite is true for analysts who downgrade more frequently, who assign ratings below those predicted by a ratings model, and whose downgrades are associated with large negative market reactions. Downgraded firms are also more likely to be assigned a new analyst. We conclude that Moody’s is balancing its desire for accuracy against its desire to cater to corporate clients.

Keywords: Credit Ratings, Credit Analysts, NRSRO, Analyst Bias, Analyst Accuracy, Career Concerns, Internal Labor Markets

JEL Classification: G14, G24, G28