Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises

Purpose This study aims to investigate whether firms engage in earnings management behavior that attempts to manipulate Credit Rating Agency (CRA) perceptions during the Watchlist process and, if so, whether earnings management behavior appears to influence CRAs’ decisions. Design/methodology/approach To measure earnings management activities, this paper computes accrual-based and real earnings management measures in the year or in the quarter immediately before the Watchlist resolutions for all negative and positive Watchlist firms. To examine the association between the levels of earnings management and Watchlist resolutions, a logit model is applied to the data obtained from a sample of Watchlist firms. Findings Some evidence suggests that managers in Watchlist firms manage earnings in attempts to gain favorable Watchlist treatment. The findings are consistent with the Graham et al.’s (2005) survey evidence, which shows that one of the primary reasons for earnings management is to gain (or preserve) a desirable rating. In addition, CRAs appear to be misled by these attempts during the negative Watchlist process period. Research limitations/implications The findings support SEC’s (2011, 2013a, 2013b) rules to reduce its reliance on credit ratings and the recent regulation reforms concerning the competition in the rating industry [the Credit Rating Agency Reform Act (2006)], and concerning conflicts of interest of CRAs among others [Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)]. Originality/value While many studies examine whether managers use discretionary accruals as a tool to manage earnings to obtain favorable ratings, those studies do not consider manipulation of real operating activities to manage earnings and CRA perceptions.

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ARE SHORT SELLERS INFORMED? EVIDENCE FROM CREDIT RATING AGENCY ANNOUNCEMENTS

The Journal of Financial Research ◽

10.1111/jfir.12121 ◽

2017 ◽

Vol 40 (2) ◽

pp. 179-221 ◽

Cited By ~ 4

Author(s):

Jian Shi ◽

Junbo Wang ◽

Ting Zhang

Keyword(s):

Credit Rating ◽

Credit Rating Agency ◽

Rating Agency ◽

Short Sellers

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Legislative pressure and credit rating agency behavior

Risk Governance and Control Financial Markets & Institutions ◽

10.22495/rgcv11i2p5 ◽

2021 ◽

Vol 11 (2) ◽

pp. 58-70

Author(s):

Ola Nilsson

Keyword(s):

Credit Rating ◽

The European Union ◽

Market Reactions ◽

Credit Rating Agency ◽

Rating Agency ◽

Change Behavior ◽

Time Period ◽

Agency Behavior ◽

Intention To Change ◽

Flow Of Information

This study investigates whether legislative pressure influences credit rating agency (CRA) behavior. It covers a time period in which the European Union moves from exerting minimal to intense legislative pressure on CRAs, providing an almost ideal context for analyzing if and how CRAs are affected by this pressure. Two possible outcomes are discussed: 1) more timeliness in the flow of information and 2) more stickiness in the flow of information. The analysis is based on an examination of market reactions following CRA announcements between 2000 and 2019. The results show that the market reactions after CRA announcements decrease when legislative pressure increases. The interpretation is that as legislative pressure increases, the flow of information from CRAs becomes stickier. This confirms that legislative initiatives that put pressure on CRAs have an effect, evidence that legislators’ intention to change behavior by threatening or initiating new regulations works, which confirms assumptions underlying the theory of legislative threats (Halfteck, 2008). A reasonable interpretation of legislators’ push for changes in this context is that they want to see a faster flow of information. The results, however, show the opposite. A plausible explanation for this is increased caution on the part of CRAs because if in retrospect, the information in an announcement turns out to be wrong or misleading, the ensuing criticism could lead to additional pressure.

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