Issuer Bias in Corporate Ratings Toward Financially Constrained Firms

35 Pages Posted: 19 Dec 2017

See all articles by Mohammad Nazmul Hasan

Mohammad Nazmul Hasan

Office of the Comptroller of the Currency - Risk Analysis Division

Nikunj Kapadia

University of Massachusetts Amherst - Department of Finance

Akhtar R. Siddique

Government of the United States of America - Risk Analysis Division

Date Written: December 14, 2017

Abstract

Rating downgrades can have adverse consequences on a firm due to the feedback effect, even when ratings lack informational content. In this paper, we consider whether the rating agency attempts to mitigate the feedback effect through its rating actions. Using Moody’s issuer ratings over 1982–2009, we show that firms with greater external financing constraints are less likely to be downgraded. The issuer bias is robust, and its economic significance increases at times when economy-wide credit spreads are unusually high. We document that severely constrained firms whose ratings are affirmed or upgraded have long-term positive excess equity returns.

Keywords: credit ratings, issuer bias, financial constraints, feedback effect, default risk

Suggested Citation

Hasan, Mohammad Nazmul and Kapadia, Nikunj and Siddique, Akhtar R., Issuer Bias in Corporate Ratings Toward Financially Constrained Firms (December 14, 2017). Journal of Credit Risk, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3087923

Mohammad Nazmul Hasan

Office of the Comptroller of the Currency - Risk Analysis Division ( email )

400 7th Street, SW
Mail Stop 63-3
Washington, DC 20219-0001
United States

Nikunj Kapadia (Contact Author)

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States
413-545-5643 (Phone)
413-545-5600 (Fax)

HOME PAGE: http://www-unix.oit.umass.edu/~nkapadia/

Akhtar R. Siddique

Government of the United States of America - Risk Analysis Division ( email )

400 7th Ave
Washington, DC 20219
United States
202-649-5526 (Phone)

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