More than a Letter: Evidence on the Determinants and Impact of Credit Rating Report Content

Abstract

We document large variations in information contained in rating reports, distinct from the letter rating. We examine the readability, length, numerical content, uncertainty, and uniqueness of Moody’s rating reports. We find that individual analyst style explains about 20% of content variation, reports provide more information for larger, more complex, and better rated firms, and rating bias influences content. Additional evidence indicates that information contained in reports significantly improves with litigation risk due to the Dodd-Frank Act. Finally, we show that the stock market reaction is significantly affected by rating content and that rating content predicts future rating changes.

Keywords: Credit ratings, Regulation, Analysts, Informational Content, Textual analysis

JEL Classification: G01, G14, G24, G28