The Use of Accounting Numbers by Information Intermediaries in the Pre-Sec Era

43 Pages Posted: 17 Sep 2004

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Rachna Prakash

University of Mississippi - Patterson School of Accountancy

Gregory B. Waymire

Emory University - Department of Accounting

Date Written: June 1, 2004

Abstract

We examine the extent to which financial statement ratios in the pre-SEC era were associated with Moody's securities ratings. A lack of association in this unregulated era would be consistent with subsequent accounting regulation improving the informativeness of financial reporting, whereas significant associations in predicted directions would indicate a need to quantify the incremental benefit, if any, of accounting and securities regulation. Because Moody's reported ratings components in addition to the overall ratings during our time period, we are also able to explore the structure underlying overall ratings. In particular, we examine the weights given to the components in the overall rating, as well as the accounting, contractual and market variables that determine each component. Our analysis indicates that bond ratings exhibit a significant positive association between income statement (ROE) and balance sheet (Current Ratio) ratios and overall Moody's bond ratings. Additional findings suggest that income statement and balance sheet ratios link structurally to the overall rating through differing components, as predicted. ROE is positively related to Moody's bond Safety rating (a measure of fixed charge coverage) while the Current Ratio links to Moody's bond Security rating (a measure of asset backing). Moody's third bond rating component, Salability, reflects the ease with which the bond can be readily sold. As predicted, we document that accounting ratios exert less influence over Salability compared to Safety and Security. However, unlike for Safety and Security, we document a significant positive between Salability and a measure of the extent of disclosure by the firm. Several of these findings extend to Moody's ratings of preferred and common stocks.

Suggested Citation

Basu, Sudipta and Prakash, Rachna and Waymire, Gregory B., The Use of Accounting Numbers by Information Intermediaries in the Pre-Sec Era (June 1, 2004). , . Available at SSRN: https://ssrn.com/abstract=591325 or http://dx.doi.org/10.2139/ssrn.591325

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Rachna Prakash

University of Mississippi - Patterson School of Accountancy ( email )

200 Conner Hall
University, MS 38677
United States

Gregory B. Waymire (Contact Author)

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-6589 (Phone)
404-727-6313 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
76
Abstract Views
755
PlumX Metrics