Qualitative Disclosure and Credit Analysts' Soft Rating Adjustments

48 Pages Posted: 5 May 2017 Last revised: 24 Aug 2018

See all articles by Zahn Bozanic

Zahn Bozanic

Ohio State University (OSU) - Fisher College of Business

Pepa Kraft

HEC Paris

Date Written: October 1, 2014

Abstract

While academics have extensively studied quantitative models of credit risk, far less is known about credit analysts’ "behind-the-scenes" adjustments to the ratings generated by their models. Using both dictionary-based and topic modeling approaches, we examine whether and how credit analysts use borrowers’ qualitative disclosures to extract information pertaining to credit risk in making their assessments. We decompose publicly-available ratings into qualitative factors (soft adjustments) and quantitative factors (hard adjustments) and find that credit analysts’ soft adjustments, but not the hard adjustments, reflect information in borrowers’ qualitative disclosures. Our results further indicate that the association between firms’ qualitative disclosures and soft adjustments increases with the intensity of the rating agency’s reliance on public disclosure. We also examine whether analysts’ use of credit risk-relevant information from borrowers’ qualitative disclosures render ratings more credible and thus informative. We find that the credit rating downgrades of borrowers that provide more qualitative disclosures are more informative than those that do not; however, the increase in informativeness diminishes after the Dodd-Frank Act, when the legal liability for credit rating agencies increased.

Keywords: Credit ratings, soft information, qualitative disclosure

JEL Classification: M40, G24

Suggested Citation

Bozanic, Zahn and Kraft, Pepa, Qualitative Disclosure and Credit Analysts' Soft Rating Adjustments (October 1, 2014). Available at SSRN: https://ssrn.com/abstract=2962491 or http://dx.doi.org/10.2139/ssrn.2962491

Zahn Bozanic

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Pepa Kraft (Contact Author)

HEC Paris ( email )

Jouy-en-Josas
France
644161543 (Phone)

HOME PAGE: http://www.hec.edu/Faculty-Research/Faculty-Directory/KRAFT-Pepa2

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