Follow the Money: Investor Trading Around Investor-Paid Credit Rating Changes
63 Pages Posted: 1 Aug 2014 Last revised: 21 Nov 2019
Date Written: March 25, 2019
Abstract
Using institutional equity trading data, we find that a set of small institutional investors consistently follow credit ratings issued by an investor-paid rating agency in their trading decisions. Although rating information is credit related, we find that these followers often respond more strongly to investor-paid ratings than to influential trading signals, such as earnings announcements, analysts’ earnings forecast revisions, and recommendation changes. Followers outperform non-followers, and show improved trading performance after becoming followers. We conclude that investor-paid rating agencies offer small institutional investors a cost-effective alternative to in-house research.
Keywords: Investor-Paid Credit Rating Agencies, Credit Ratings, Capital Market Regulation
JEL Classification: G11, G14, G24, G28
Suggested Citation: Suggested Citation