Can Shareholders of Rating Agencies Time Rating Changes?

41 Pages Posted: 20 Sep 2019 Last revised: 30 Jun 2020

See all articles by Xiang Gao

Xiang Gao

University of North Dakota

Cihan Uzmanoglu

Binghamton University, The State University of New York

Date Written: September 10, 2019

Abstract

We find that large shareholders of Moody’s (affiliated investors) abnormally decrease their stock ownerships in a firm before its downgrade by Moody’s. This finding is stronger for informationally opaque stocks and active affiliated investors, significant only after Moody’s initial public offering when affiliated investors become Moody’s shareholders, and insignificant among Moody’s small shareholders and for rating upgrades that are not expected to impact stock prices. Affiliated investors do not trade abnormally before S&P’s or Fitch’s downgrades. Additional tests suggest that, rather than trading on illicit tips, affiliated investors have a soft information advantage in timing Moody’s ratings.

Keywords: Credit Rating Agencies, Conflict of Interest, Large Shareholders, Reg FD

JEL Classification: G14, G18, G20, G24, G32, M48.

Suggested Citation

Gao, Xiang and Uzmanoglu, Cihan, Can Shareholders of Rating Agencies Time Rating Changes? (September 10, 2019). Available at SSRN: https://ssrn.com/abstract=3452307 or http://dx.doi.org/10.2139/ssrn.3452307

Xiang Gao

University of North Dakota ( email )

Box 7096
Grand Forks, ND 58202
United States

Cihan Uzmanoglu (Contact Author)

Binghamton University, The State University of New York ( email )

Binghamton, NY 13902-6001
United States
607 777 66 38 (Phone)

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