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Do Security Analysts Discipline Credit Rating Agencies?
[Credit ratings accuracy and analyst incentives]

Author

Listed:
  • Kingsley Fong
  • Harrison Hong
  • Marcin Kacperczyk
  • Jeffrey D Kubik

Abstract

Credit ratings of corporations are biased, but the forces driving this bias are unclear. We argue it would be difficult for rating agencies to issue high grades for a firm’s debt when there are a lot of objective equity analyst reports about the firm’s earnings that are informative about its default. We find that an exogenous drop in analyst coverage leads to greater optimism-bias in ratings, especially for firms with little bond analyst coverage and those that are close to default. This coverage-induced shock leads to less informative ratings about future defaults and downgrades and more subsequent bond security mispricings.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Kingsley Fong & Harrison Hong & Marcin Kacperczyk & Jeffrey D Kubik, 2022. "Do Security Analysts Discipline Credit Rating Agencies? [Credit ratings accuracy and analyst incentives]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(4), pages 815-848.
    • Handle: RePEc:oup:rcorpf:v:11:y:2022:i:4:p:815-848.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfac021
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    References listed on IDEAS

    as
    1. Heski Bar-Isaac & Joel Shapiro, 2011. "Credit Ratings Accuracy and Analyst Incentives," American Economic Review, American Economic Association, vol. 101(3), pages 120-124, May.
    2. Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
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    Cited by:

    1. Krystyniak, Karolina & Staneva, Viktoriya, 2024. "The myth of tightening credit rating standards in the market for corporate debt," Journal of Banking & Finance, Elsevier, vol. 162(C).

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