Follow the Money: Investor Trading Around Investor-Paid Credit Rating Changes

63 Pages Posted: 1 Aug 2014 Last revised: 21 Nov 2019

See all articles by Utpal Bhattacharya

Utpal Bhattacharya

HKUST Business School

Kelsey D. Wei

University of Texas at Dallas

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

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

Bhattacharya, Utpal and Wei, Kelsey D. and Xia, Han, Follow the Money: Investor Trading Around Investor-Paid Credit Rating Changes (March 25, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2474391 or http://dx.doi.org/10.2139/ssrn.2474391

Utpal Bhattacharya

HKUST Business School ( email )

Clear Water Bay
Kowloon
Hong Kong

Kelsey D. Wei

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

Han Xia (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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