Does rating analyst subjectivity affect corporate debt pricing?

Cesare Fracassi, Stefan Petry and Geoffrey Tate

Journal of Financial Economics, 2016, vol. 120, issue 3, 514-538

Abstract: We find evidence of systematic optimism and pessimism among credit analysts, comparing contemporaneous ratings of the same firm across rating agencies. These differences in perspectives carry through to debt prices and negatively predict future changes in credit spreads, consistent with mispricing. Moreover, the pricing effects are the largest among firms that are the most opaque, likely exacerbating financing constraints. We find that masters of business administration (MBAs) provide higher quality ratings. However, optimism increases and accuracy decreases with tenure covering the firm. Our analysis demonstrates the role analysts play in shaping investor expectations and its effect on corporate debt markets.

Keywords: Analysts; Credit ratings; Credit spreads; Investor sentiment (search for similar items in EconPapers)
JEL-codes: G02 G12 G24 G32 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:120:y:2016:i:3:p:514-538

DOI: 10.1016/j.jfineco.2016.02.006

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