scholarly journals Legislative pressure and credit rating agency behavior

2021 ◽  
Vol 11 (2) ◽  
pp. 58-70
Author(s):  
Ola Nilsson
Keyword(s):  
Credit Rating ◽  
The European Union ◽  
Market Reactions ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Change Behavior ◽  
Time Period ◽  
Agency Behavior ◽  
Intention To Change ◽  
Flow Of Information

This study investigates whether legislative pressure influences credit rating agency (CRA) behavior. It covers a time period in which the European Union moves from exerting minimal to intense legislative pressure on CRAs, providing an almost ideal context for analyzing if and how CRAs are affected by this pressure. Two possible outcomes are discussed: 1) more timeliness in the flow of information and 2) more stickiness in the flow of information. The analysis is based on an examination of market reactions following CRA announcements between 2000 and 2019. The results show that the market reactions after CRA announcements decrease when legislative pressure increases. The interpretation is that as legislative pressure increases, the flow of information from CRAs becomes stickier. This confirms that legislative initiatives that put pressure on CRAs have an effect, evidence that legislators’ intention to change behavior by threatening or initiating new regulations works, which confirms assumptions underlying the theory of legislative threats (Halfteck, 2008). A reasonable interpretation of legislators’ push for changes in this context is that they want to see a faster flow of information. The results, however, show the opposite. A plausible explanation for this is increased caution on the part of CRAs because if in retrospect, the information in an announcement turns out to be wrong or misleading, the ensuing criticism could lead to additional pressure.

Are credit rating agency analysts valuable?

2015 ◽  
Vol 16 (4) ◽  
pp. 378-394 ◽  
Author(s):  
Rahmi Erdem Aktug ◽  
Nandu (Nandkumar) Nayar ◽  
Jesus M Salas
Keyword(s):  
Credit Rating ◽  
Securities And Exchange Commission ◽  
Market Reactions ◽  
Content Type ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Financial Firms ◽  
The Usa ◽  
Debt Market ◽  
The Impact

Purpose – This paper aims to determine the equity and debt market reactions of firms to the news of their hiring a credit rating agency (CRA) analyst. Due to recent controversies related to CRAs, the US Securities and Exchange Commission (SEC) requires disclosure of the hiring of an analyst if the analyst recently worked for a rating agency that previously provided a rating for the hiring firm. The authors use those filings to estimate the market value of a credit rating analyst to the hiring firm. Design/methodology/approach – This paper examines the impact of analyst transfers from rating agencies to financial firms in the USA between 2006 and 2014. Findings – The authors find that the hiring of such analysts suggests a value increase for the debt securities of the hiring firm but no such value phenomenon for the equity of the employer firm. Research limitations/implications – Thus, markets apparently perceive that credit analysts bring valuable inside knowledge about potential clients and about the credit rating formation process to their employer. Practical implications – This study confirms the need for additional disclosure from CRAs. This study could help the SEC as it discusses ways to require additional disclosure (those discussions are already taking place. New regulations will come out some time in the next couple of years). Originality/value – This study is the first to examine the impact of such transfers on the prices of marketed securities of firms hiring such analysts.

Do managers manipulate earnings to influence credit rating agencies’ decisions?

2017 ◽  
Vol 16 (3) ◽  
pp. 366-384
Author(s):  
Qiuhong Zhao
Keyword(s):  
Earnings Management ◽  
Credit Rating ◽  
Conflicts Of Interest ◽  
Real Earnings Management ◽  
Management Behavior ◽  
Wall Street ◽  
Content Type ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Management Measures

Purpose This study aims to investigate whether firms engage in earnings management behavior that attempts to manipulate Credit Rating Agency (CRA) perceptions during the Watchlist process and, if so, whether earnings management behavior appears to influence CRAs’ decisions. Design/methodology/approach To measure earnings management activities, this paper computes accrual-based and real earnings management measures in the year or in the quarter immediately before the Watchlist resolutions for all negative and positive Watchlist firms. To examine the association between the levels of earnings management and Watchlist resolutions, a logit model is applied to the data obtained from a sample of Watchlist firms. Findings Some evidence suggests that managers in Watchlist firms manage earnings in attempts to gain favorable Watchlist treatment. The findings are consistent with the Graham et al.’s (2005) survey evidence, which shows that one of the primary reasons for earnings management is to gain (or preserve) a desirable rating. In addition, CRAs appear to be misled by these attempts during the negative Watchlist process period. Research limitations/implications The findings support SEC’s (2011, 2013a, 2013b) rules to reduce its reliance on credit ratings and the recent regulation reforms concerning the competition in the rating industry [the Credit Rating Agency Reform Act (2006)], and concerning conflicts of interest of CRAs among others [Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)]. Originality/value While many studies examine whether managers use discretionary accruals as a tool to manage earnings to obtain favorable ratings, those studies do not consider manipulation of real operating activities to manage earnings and CRA perceptions.

ARE SHORT SELLERS INFORMED? EVIDENCE FROM CREDIT RATING AGENCY ANNOUNCEMENTS

2017 ◽  
Vol 40 (2) ◽  
pp. 179-221 ◽  
Author(s):  
Jian Shi ◽  
Junbo Wang ◽  
Ting Zhang
Keyword(s):  
Credit Rating ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Short Sellers

scholarly journals Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises

2014 ◽  
Author(s):  
Christopher F. Baum ◽  
Margarita Karpava ◽  
Dorothea Schhfer ◽  
Stephan Andreas
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Debt Crises

scholarly journals Empirical evolution of credit risk over a decade in IBEX. 35 companies and its relationship with the qualification of its ratings

2020 ◽  
Vol 16 (2) ◽  
pp. 61
Author(s):  
Josep Patau
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Clear Correlation ◽  
Crisis Period ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Determining Factors ◽  
Commercial Loans ◽  
The One

Object: The present work responds to two objectives. On the one hand, it describes the evolution of the main economic-financial indicators that influence credit risk (insolvency) for a sample of 10 Spanish companies listed on the IBEX 35. This analysis is studied for a comparative period of 10 years, which coincides with a pre-crisis stage (2002-2005) and an economic post-crisis phase (2012-2015). On the other hand, it corroborates the relationship between the analysed insolvency and the rating or credit-risk rating published for these companies by an internationally recognized credit rating agency, Standard & Poor's (S & P).Design / methodology: A sample of 10 companies and a 10-year period including the years 2002-2005 (pre-crisis) and the years 2012-2015 (post-crisis) are chosen, omitting the Spanish economic crisis that occurred in the year 2008. For the study of its evolution, 6 ratios obtained from the scientific literature that relate to credit risk and its effects on investments and company results are calculated. Finally, the correlations of these variables with the ratings of credit risk assessment by the rating agency S & P are measured. Descriptive statistics will assign value and graphics to this ten-year evolution, and with the incorporation of a factorial analysis, the correlation between the ratios and the S & P rating will be determined. The statistical analysis explains this correlation to a greater extent.Contributions / results: The results show a clear increase in the value of the impairment variable due to credit risk ten years later that directly affects the results of the companies, despite these companies having significantly reduced their investments in commercial loans pending collection and drastically reduced the period means of collection of clients. In turn, there is a clear correlation between the insolvency studied and the variables used by the S & P rating agency for the assessment of credit risk.Added value / conclusions: The empirical study concludes that there is a correspondence between insolvency and the rating given by an internationally prestigious rating agency (S & P) for the sample of 10 companies studied. Three variables – customer balance-accounts receivable, investments and the net amount of turnover – are determining factors explaining this correlation, and these three variables are the same ones that decisively influence both the pre-crisis period and the post-crisis period 10 years apart. The rating agencies weigh the insolvency variable in their analyses.

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