Bond Rating Agencies and Stock Analysts: Who Knows What When?

33 Pages Posted: 2 Dec 1996

See all articles by Louis H. Ederington

Louis H. Ederington

University of Oklahoma - Division of Finance

Jeremy Goh

Singapore Management University - Lee Kong Chian School of Business

Jacob Nelson

Bank for International Settlements

Date Written: October 1996

Abstract

Both bond rating agencies and stock analysts evaluate publicly traded companies and communicate their findings and opinions to investors. This study compares the timeliness of each and explores Granger causality between the two. We find that bond rating downgrades are partially a response to information which both the market and earnings analysts already have and which they have already impounded in prices and earnings forecasts respectively. However, downgrades are also viewed by both earnings analysts and market participants as providing some new information - the market reacts negatively and analysts revise their forecasts sharply downward. Indeed, the reaction of earnings analysts to downgrades exceeds their response to other informational events as documented in previous studies. Controlling for pre-downgrade information releases, we find that analysts reduce their forecasts about 7% in the first month following a downgrade and about 13% over three months. We find that the post-downgrade earnings forecast revisions are partially predictable from the market response to the downgrade implying that those downgrades which are a surprise to market participants and which they view as providing new information are viewed the same way by earnings analysts. On the other hand, we find no evidence that the market response is partially predictable from the pre-downgrade earnings forecast revisions. While the market apparently views upgrades as providing no new information, since there is no market response to the announcement, we find that stock analysts tend to revise their earnings forecasts upward following upgrades. However, these upward revisions are much smaller than the downward revisions following downgrades. Throughout our analysis, we control for the tendency for analysts to be overly optimistic initially and to respond with a lag to public information.

JEL Classification: G19

Suggested Citation

Ederington, Louis H. and Goh, Jeremy and Nelson, Jacob J., Bond Rating Agencies and Stock Analysts: Who Knows What When? (October 1996). Available at SSRN: https://ssrn.com/abstract=940 or http://dx.doi.org/10.2139/ssrn.940

Louis H. Ederington (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States
405-325-5591 (Phone)
405-325-7688 (Fax)

Jeremy Goh

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Jacob J. Nelson

Bank for International Settlements ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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