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Is there valuable private information in credit ratings?

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  • Alanis, Emmanuel

Abstract

Credit rating agencies (CRAs) contend their ratings contain a quantitative assessment based on hard information, and a qualitative adjustment based on private information. We study if the qualitative portion of ratings, generated with the companies’ own private information, contains valuable information for equity investors. We generate predicted ratings based on hard information alone and form portfolios of stocks based on the difference between observed and predicted ratings. Over a sample from 1998 to 2018, we find that stock portfolios formed on the basis of private information generate 2% to 4% in annual risk-adjusted returns. We also find that companies with positive private information have better future accounting performance. Our results suggest that CRAs bring valuable information to the market and investors could benefit from it.

Suggested Citation

  • Alanis, Emmanuel, 2020. "Is there valuable private information in credit ratings?," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301832
    DOI: 10.1016/j.najef.2020.101293
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    References listed on IDEAS

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    1. Yu, Baojun & Li, Changming & Mirza, Nawazish & Umar, Muhammad, 2022. "Forecasting credit ratings of decarbonized firms: Comparative assessment of machine learning models," Technological Forecasting and Social Change, Elsevier, vol. 174(C).

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    More about this item

    Keywords

    Credit ratings; Risk-adjusted returns; Credit rating agencies; Ratings shopping;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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