Investor-Paid Rating Agency, Information Disclosure, and Stock Price Crash Risk

Jieyi Lu, Wanfa Lin, Huiyu Guo and Jinyu Luo

Emerging Markets Finance and Trade, 2024, vol. 60, issue 8, 1815-1840

Abstract: This paper examines the impact of investor-paid rating agency on stock price crash risk. The findings reveal a substantial 127.6% reduction in the stock price crash risk for stocks tracked by investor-paid rating agency compared to those without such tracking. As for the mechanism, the following of investor-paid rating agency reduces earnings management, induces more negative information disclosure, and improves information disclosure quality. The impact of investor-paid rating agency is more pronounced in firms with poorer corporate governance. Further analysis indicates that the impact of investor-paid rating agency increases with the frequency of rating tracking and the rating difference between issuer-paid rating agency and investor-paid rating agency, while stock market reaction induced by investor-paid rating agency has little effect on the baseline result. Moreover, the tracking of investor-paid rating agency facilitates the information flow between the bond market and stock market, and improves analyst forecast performance. In summary, we suggest that investor-paid rating agency tracking acts as a valid passive monitoring mechanism to alleviate principal-agent problems and provide information on firms’ downside risk.

Date: 2024
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DOI: 10.1080/1540496X.2023.2287496

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