Incentives, Clienteles, and Information Production: New Evidence from Investor-paid and Issuer-Paid Agency Credit Ratings and Equity Analyst Recommendations

42 Pages Posted: 8 Feb 2020

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Igor Karagodsky

Analysis Group, Inc.

Francesca Toscano

Wayne State University - Mike Ilitch School of Business

Date Written: January 19, 2020

Abstract

We compare the timeliness of the information signals produced by investor-paid credit rating agencies (Egan and Jones), issuer-paid credit rating agencies (Standard and Poor's), and by sell-side equity analysts, and study the predictive power of this information for the bond and equity markets and for firm investment levels. We conjecture that the three information producing intermediaries differ in two important dimensions: first, in their compensation structure, giving rise to differences in their incentives to produce and transmit timely information signals; and second, in their information consuming clientele, giving rise to differences in the aspects of firms' future cash flow distribution on which they focus. We develop testable hypotheses based on the above two differences. Consistent with our hypotheses, we find the following. First, information signals produced by the investor-paid rating agency are the most timely, and anticipates those produced by the issuer-paid agency and equity analysts. Second, while investor-paid agency rating changes have the greatest predictive power for bond yield spreads, equity analyst recommendations have the greatest predictive power for excess stock returns. Third, credit rating changes by the investor-paid rating agency have the greatest predictive power for firms' investment levels.

Keywords: Equity Analysts, Issuer-paid Credit Rating Agencies, Investor-paid Credit Rating Agencies

JEL Classification: G14, G20, G24

Suggested Citation

Chemmanur, Thomas J. and Karagodsky, Igor and Toscano, Francesca, Incentives, Clienteles, and Information Production: New Evidence from Investor-paid and Issuer-Paid Agency Credit Ratings and Equity Analyst Recommendations (January 19, 2020). Available at SSRN: https://ssrn.com/abstract=3522167 or http://dx.doi.org/10.2139/ssrn.3522167

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Igor Karagodsky

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

Francesca Toscano (Contact Author)

Wayne State University - Mike Ilitch School of Business ( email )

2771 Woodward Ave
Detroit, MI 48201
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
24
Abstract Views
172
PlumX Metrics