The Effect of Reputation Shocks to Rating Agencies on Corporate Disclosures

Forthcoming in The Accounting Review

Posted: 12 Oct 2016 Last revised: 24 Apr 2018

Date Written: March 18, 2018

Abstract

This paper explores the effect of credit rating agency’s (CRA) reputation on the voluntary disclosures of corporate bond issuers. Academics, practitioners, and regulators disagree on the informational role played by major CRAs and the usefulness of credit ratings in influencing investors’ perception of the credit risk of bond issuers. Using management earnings forecasts as a measure of voluntary disclosure, I find that investors demand more (less) disclosure from corporate bond issuers when the ratings become less (more) credible. In addition, using content analytics, I find that bond issuers disclose more qualitative (i.e. textual) information during periods of low CRA reputation to aid investors better assess credit risk. That the corporate managers alter their voluntary disclosure in response to CRA reputation shocks is consistent with credit ratings providing incremental information to investors and reducing adverse selection in lending markets. Further, consistent with theoretical predictions, my findings suggest that managers rely on voluntary disclosure as a credible mechanism to reduce information asymmetry in bond markets.

Keywords: Voluntary Disclosure, Management Forecasts, Credit Rating Agencies, CRA, Reputation, Statistical Learning, Content Analytics

JEL Classification: M41

Suggested Citation

Sethuraman, Mani, The Effect of Reputation Shocks to Rating Agencies on Corporate Disclosures (March 18, 2018). Forthcoming in The Accounting Review, Available at SSRN: https://ssrn.com/abstract=2850597 or http://dx.doi.org/10.2139/ssrn.2850597

Mani Sethuraman (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,774
PlumX Metrics