Analyst Following and Credit Ratings

53 Pages Posted: 30 Sep 2005 Last revised: 13 Mar 2008

See all articles by Mei Cheng

Mei Cheng

University of Arizona - Department of Accounting

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Abstract

This paper examines the relation between financial (equity) analyst following and default risk, which we proxy by issuer credit ratings. We hypothesize that analyst following reduces default risk because of both the monitoring and the informational roles of financial analysts. Using a large sample of firms, we find evidence consistent with this conjecture. In particular, we find that analyst following is negatively related to a firm's default risk (credit rating). The effect of analyst following on credit ratings is less pronounced for firms with a superior information environment and stronger controls. Similarly, the effect of analyst following on a firm's credit rating is lower when analysts' information quality is poor. Our results are robust to controlling for several factors including the endogenous relation between credit ratings, institutional holdings, and analyst following. Our study documents important spillover effects of financial (equity) analysts to the debt market.

Keywords: analyst following, credit rating, cost of debt,

JEL Classification: G10, G12, G29, G32, M41

Suggested Citation

Cheng, Mei and Subramanyam, K.R., Analyst Following and Credit Ratings. Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=813104 or http://dx.doi.org/10.2139/ssrn.813104

Mei Cheng

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

K.R. Subramanyam (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

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