Information Embedded in Option Prices: Evidence from Credit Rating Agency Announcements

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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Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises

SSRN Electronic Journal ◽

10.2139/ssrn.2646513 ◽

2014 ◽

Cited By ~ 1

Author(s):

Christopher F. Baum ◽

Margarita Karpava ◽

Dorothea Schhfer ◽

Stephan Andreas

Keyword(s):

Sovereign Debt ◽

Credit Rating ◽

Credit Rating Agency ◽

Rating Agency ◽

Debt Crises

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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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Empirical evolution of credit risk over a decade in IBEX. 35 companies and its relationship with the qualification of its ratings

Intangible Capital ◽

10.3926/ic.1691 ◽

2020 ◽

Vol 16 (2) ◽

pp. 61

Author(s):

Josep Patau

Keyword(s):

Credit Risk ◽

Credit Rating ◽

Clear Correlation ◽

Crisis Period ◽

Rating Agencies ◽

Credit Rating Agency ◽

Rating Agency ◽

Determining Factors ◽

Commercial Loans ◽

The One

Object: The present work responds to two objectives. On the one hand, it describes the evolution of the main economic-financial indicators that influence credit risk (insolvency) for a sample of 10 Spanish companies listed on the IBEX 35. This analysis is studied for a comparative period of 10 years, which coincides with a pre-crisis stage (2002-2005) and an economic post-crisis phase (2012-2015). On the other hand, it corroborates the relationship between the analysed insolvency and the rating or credit-risk rating published for these companies by an internationally recognized credit rating agency, Standard & Poor's (S & P).Design / methodology: A sample of 10 companies and a 10-year period including the years 2002-2005 (pre-crisis) and the years 2012-2015 (post-crisis) are chosen, omitting the Spanish economic crisis that occurred in the year 2008. For the study of its evolution, 6 ratios obtained from the scientific literature that relate to credit risk and its effects on investments and company results are calculated. Finally, the correlations of these variables with the ratings of credit risk assessment by the rating agency S & P are measured. Descriptive statistics will assign value and graphics to this ten-year evolution, and with the incorporation of a factorial analysis, the correlation between the ratios and the S & P rating will be determined. The statistical analysis explains this correlation to a greater extent.Contributions / results: The results show a clear increase in the value of the impairment variable due to credit risk ten years later that directly affects the results of the companies, despite these companies having significantly reduced their investments in commercial loans pending collection and drastically reduced the period means of collection of clients. In turn, there is a clear correlation between the insolvency studied and the variables used by the S & P rating agency for the assessment of credit risk.Added value / conclusions: The empirical study concludes that there is a correspondence between insolvency and the rating given by an internationally prestigious rating agency (S & P) for the sample of 10 companies studied. Three variables – customer balance-accounts receivable, investments and the net amount of turnover – are determining factors explaining this correlation, and these three variables are the same ones that decisively influence both the pre-crisis period and the post-crisis period 10 years apart. The rating agencies weigh the insolvency variable in their analyses.

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The Effectiveness of Credit Rating Agency Monitoring: Evidence from Asset Securitizations

The Accounting Review ◽

10.2308/accr-51028 ◽

2015 ◽

Vol 90 (5) ◽

pp. 1779-1810 ◽

Cited By ~ 13

Author(s):

Samuel Bonsall ◽

Kevin Koharki ◽

Monica Neamtiu

Keyword(s):

Default Risk ◽

Credit Rating ◽

Balance Sheet ◽

Rating Agencies ◽

Credit Rating Agency ◽

Rating Accuracy ◽

Rating Agency ◽

Debt Issuance ◽

Current Exposure

ABSTRACT This study investigates how differences between the rating agencies' initial (at the date of debt issuance) and subsequent (post-issuance) monitoring incentives affect securitizing banks' rating accuracy. We hypothesize that the agencies have stronger incentives to monitor issuers when providing initial versus post-issuance ratings. We document that initial ratings are positively associated with off-balance sheet securitized assets and incrementally associated with on-balance sheet retained securities. However, subsequent ratings fail to capture current exposure to off-balance sheet securitizations. We also find that subsequent ratings reflect default risk less accurately than initial ratings. The subsequent ratings' responsiveness to default risk is worse when a bank has more off-balance sheet securitized assets. Collectively, our findings are consistent with lax post-issuance monitoring. They raise questions about the effectiveness of using ratings as an ongoing contracting mechanism and suggest that conclusions about rating accuracy could differ depending on whether researchers focus on initial versus post-issuance ratings.

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