Credit Ratings and Firm Disclosure
56 Pages Posted: 12 Jun 2019
Date Written: April 17, 2019
Do credit ratings affect the quality of firms' disclosure? We examine this question by testing for the effect of ratings on earnings management. Using novel data on rating analysts to obtain exogenous variation in ratings, we find that earnings quality improves as ratings become more optimistic. Additionally, we show firms manage earnings in a direction consistent with the financial state implied by the rating, which suggests ratings contain credible private information. Our paper implies a complementary relation between ratings and disclosure, and our results suggest a unique channel through which improving rating quality can improve other sources of public information.
Keywords: credit ratings, earnings quality, public disclosure
JEL Classification: G2, G24, G3, G39, M4, M41
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