Credit Ratings and Firm Disclosure

56 Pages Posted: 12 Jun 2019

See all articles by Yung-Ling Chi

Yung-Ling Chi

National Chung Hsing University

Sean Flynn

Colorado State University - Department of Finance and Real Estate

Date Written: April 17, 2019

Abstract

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

Suggested Citation

Chi, Yung-Ling and Flynn, Sean, Credit Ratings and Firm Disclosure (April 17, 2019). Available at SSRN: https://ssrn.com/abstract=3395533 or http://dx.doi.org/10.2139/ssrn.3395533

Yung-Ling Chi

National Chung Hsing University ( email )

402, No. 250 Kuo Kuang Road, Taiwan
Taichung, Taiwan
China

Sean Flynn (Contact Author)

Colorado State University - Department of Finance and Real Estate ( email )

Fort Collins, CO 80523-1771
United States

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