Are credit rating agency analysts valuable?

Abstract

Purpose

This paper aims to determine the equity and debt market reactions of firms to the news of their hiring a credit rating agency (CRA) analyst. Due to recent controversies related to CRAs, the US Securities and Exchange Commission (SEC) requires disclosure of the hiring of an analyst if the analyst recently worked for a rating agency that previously provided a rating for the hiring firm. The authors use those filings to estimate the market value of a credit rating analyst to the hiring firm.

Design/methodology/approach

This paper examines the impact of analyst transfers from rating agencies to financial firms in the USA between 2006 and 2014.

Findings

The authors find that the hiring of such analysts suggests a value increase for the debt securities of the hiring firm but no such value phenomenon for the equity of the employer firm.

Research limitations/implications

Thus, markets apparently perceive that credit analysts bring valuable inside knowledge about potential clients and about the credit rating formation process to their employer.

Practical implications

This study confirms the need for additional disclosure from CRAs. This study could help the SEC as it discusses ways to require additional disclosure (those discussions are already taking place. New regulations will come out some time in the next couple of years).

Originality/value

This study is the first to examine the impact of such transfers on the prices of marketed securities of firms hiring such analysts.

Citation

Aktug, R.E., Nayar, N.(N). and Salas, J.M. (2015), "Are credit rating agency analysts valuable?", Journal of Risk Finance, Vol. 16 No. 4, pp. 378-394. https://doi.org/10.1108/JRF-11-2014-0159