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Analyst Promotions within Credit Rating Agencies: Accuracy or Bias?

Published online by Cambridge University Press:  28 March 2019

Darren J. Kisgen ,
Jordan Nickerson ,
Matthew Osborn  and
Jonathan Reuter
Darren J. Kisgen*
Affiliation:
Kisgen, [email protected],
Jordan Nickerson
Affiliation:
Nickerson, [email protected],
Matthew Osborn
Affiliation:
Reuter, [email protected], Boston College Carroll School of Management
Jonathan Reuter
Affiliation:
Osborn, [email protected], independent scholar
*
Kisgen (corresponding author), [email protected]
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Abstract

We estimate Moody’s preference for accurate versus biased ratings using hand-collected data on the internal labor market outcomes of its analysts. We find that accurate analysts are more likely to be promoted and less likely to depart. The opposite is true for analysts who downgrade more frequently, who assign ratings below those predicted by a ratings model, and whose downgrades are associated with large negative market reactions. Downgraded firms are also more likely to be assigned a new analyst. These patterns are consistent with Moody’s balancing its desire for accuracy against its corporate clients’ desire for higher ratings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 3 , May 2020 , pp. 869 - 896
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank an anonymous referee, Ramin Baghai (discussant), Nicole Boyson, Thomas Chemmanur, Jess Cornaggia (discussant), Matti Keloharju, Vikram Nanda (discussant), Jeffrey Pontiff, Philip Strahan, brown bag participants at Boston College and Harvard University, seminar participants at Bentley University, Georgia State University, Nova School of Economics and Finance, Rice University, University of Arizona, University of Indiana at Bloomington, University of Kansas, and University of Virginia, and conference participants at the 2015 Economics of Credit Rating Agencies, Credit Ratings and Information Intermediaries Conference, the 2015 Colorado Finance Summit, the 2016 Northeastern University Finance Conference, the 2016 University of Connecticut Risk Management Conference, and the 2017 University of Tennessee “Smokey” Mountain Finance Conference for helpful questions and comments. We are grateful to Abe Losice for describing the criteria by which credit rating agencies are evaluated during annual U.S. Securities and Exchange Commission audits. Before collecting data on analyst career paths from LinkedIn.com, we submitted a proposal to Boston College’s Institutional Review Board (IRB). We were granted an exemption from Boston College IRB review in accordance with 45 CFR 46.101 (b) 4. Our IRB Protocol Number is 16.192.01e. The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of our employers. Any remaining errors are our own.

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