Can Shareholders of Rating Agencies Time Rating Changes?
41 Pages Posted: 20 Sep 2019 Last revised: 30 Jun 2020
Date Written: September 10, 2019
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: Suggested Citation