Tightening Credit Standards: The Role of Accounting Quality

Posted: 11 Oct 2007

See all articles by Charles Shi

Charles Shi

NUS Business School, National University of Singapore

Philippe Jorion

University of California, Irvine - Paul Merage School of Business

Sanjian Bill Zhang

California State University Long Beach

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Abstract

Over the latest 20 years, the average credit rating of U.S. corporations has trended down. Blume, Lim, and Mackinlay (1998) attribute this trend to a tightening of credit standards by agencies. We reexamine the observed decreases in credit ratings in several ways. First, we show that this downward trend does not apply to speculative-grade issuers. Second, our analysis of investment-grade issuers suggests that the apparent tightening of standards can be attributed primarily to changes in accounting quality over time. After incorporating changing accounting quality, we find no evidence that rating agencies have tightened their credit standards.

Keywords: credit rating agencies, credit standards, accounting quality, earnings management, value-relevance

JEL Classification: G14 G32 M41

Suggested Citation

Shi, Charles and Jorion, Philippe and Zhang, Sanjian, Tightening Credit Standards: The Role of Accounting Quality. Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1020314

Charles Shi (Contact Author)

NUS Business School, National University of Singapore ( email )

15 Kent Ridge Dr
Singapore, 119245
Singapore
65-65161678 (Phone)

HOME PAGE: http://bschool.nus.edu/Accounting/FacultyStaff/Facultymembers.aspx

Philippe Jorion

University of California, Irvine - Paul Merage School of Business ( email )

Campus Drive
Irvine, CA 92697-3125
United States
949-824-5245 (Phone)
949-824-8469 (Fax)

Sanjian Zhang

California State University Long Beach ( email )

1250 Bellflower Blvd.
Long Beach, CA 90840
United States

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