Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T02:17:03.722Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  06 April 2009

Louis H. Ederington  and
Jeremy C. Goh
Louis H. Ederington
Affiliation:
Finance Division, Michael F. Price College of Business, University of Oklahoma, Norman, OK 73019
Jeremy C. Goh
Affiliation:
Finance Department, College of Business, Drexel University, Philadelphia, PA 19104
Get access Rights & Permissions [Opens in a new window]

Abstract

Both bond rating agencies and stock analysts evaluate publicly traded companies and communicate their opinions to investors. Comparing the timeliness of each, we find that Granger causality flows both ways. While most bond downgrades are preceded by declines in actual and forecast earnings, both actual earnings and forecasts of future earnings tend to fall following downgrades. Although part of this post-downgrade forecast revision can be attributed to negative news regarding actual earnings, most appears to be reaction to the downgrade itself. We find little change in actual earnings following upgrades. Analysts, however, tend to increase their forecasts of future earnings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 33 , Issue 4 , December 1998 , pp. 569 - 585
Copyright
Copyright © School of Business Administration, University of Washington 1998

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abarbanell, J. S. “Do Analysts' Earnings Forecasts Incorporate Information in Prior Stock Price Changes?” Journal of Accounting and Economics, 14 (1991), 147–165.CrossRefGoogle Scholar
Brous, P. A. “Common Stock Offerings and Earnings Expectations: A Test of the Release of Unfavorable Information” Journal of Finance, 47 (09 1992), 1517–1536.Google Scholar
Brous, P. A., and Kini, O.. “A Reexamination of Analysts' Earnings Forecasts for Takeover Targets.” Journal of Financial Economics, 33 (04 1993), 210–226.Google Scholar
Chan, L.; Jegadeesh, N.; and Lakonishok, J.. “Momentum Strategies.” Journal of Finance, 51 (06 1996), 1681–1714.Google Scholar
Chandra, U., and Nayar, N.. “The Information Content of Commercial Paper Rating Downgrades: Further Evidence.” Journal of Accounting, Auditing, and Finance, 13 (Fall 1998), 417–435.CrossRefGoogle Scholar
Cornell, B.; Landsman, W.; and Shapiro, A.. “Cross-sectional Regularities in the Response of Stock Prices to Bond Rating Changes.” Journal of Accounting, Auditing, and Finance, 4 (1989), 460–479.Google Scholar
Ederington, L. H. “Bond Ratings.” In The New Palgrave Dictionary of Money and Finance, vol. 1, Newman, Peter, Milgate, Murray, and Eatwell, John eds. London, England: Macmillian Press Ltd. (1992), 220–221.Google Scholar
Ederington, L. H., and Yawitz, J.. “The Bond Rating Process.” In Handbook of Financial Markets and Institutions, 6th ed., Altman, E., ed. New York, NY: John Wiley and Sons (1987).Google Scholar
Givoly, D., and Lakonishok, J.. “Properties of Analysts' Forecasts of Earnings: a Review and Analysis of the Research.” Journal of Accounting Literature, 3 (1984), 117–152.Google Scholar
Goh, J. C., and Ederington, L.. “Is a Bond Rating Downgrade Good News, Bad News, or No News to Stockholders?” Journal of Finance, 48 (12 1993), 2001–2008.CrossRefGoogle Scholar
Hand, J.; Holthausen, R.; and Leftwich, R.. “The Effect of Bond Rating Agency Announcements on Bond and Stock Prices.” Journal of Finance, 47 (06 1992), 733–752.CrossRefGoogle Scholar
Holthausen, R., and Leftwich, R.. “The Effect of Bond Rating Changes on Common Stock Prices.” Journal of Financial Economics, 17 (1986), 57–89.Google Scholar
Kang, S. H.; O'Brien, J.; and Sivaramakrishnan, K.. “Analysts' Interim Earnings Forecasts: Evidence on the Forecasting Process.” Journal of Accounting Research, 31 (1994), 50–61.Google Scholar
Lys, T., and Sohn, S.. “The Association between Revisions of Financial Analysts' Earnings Forecasts and Security Price Changes.” Journal of Accounting and Economics, 13 (1990), 341–363.CrossRefGoogle Scholar
Matolcsy, Z. P., and Lianto, T.. “The Incremental Information Content of Bond Rating Revisions: The Australian Evidence” Journal of Banking and Finance, 19 (08 1995), 891–902.CrossRefGoogle Scholar
O'Brien, P. “Analysts' Forecasts as Earnings Expectations.” Journal of Accounting and Economics, 10 (1988), 187–221.Google Scholar
Stickel, S. “Common Stock Returns surrounding Earnings Forecast Revisions: More Puzzling Evidence.” Accounting Review, 66 (1991), 402–416.Google Scholar
Wansley, J., and Clauretie, J.. “The Impact of Credit Watch Placement on Equity Returns and Bond Prices.” Journal of Financial Research, 8 (Spring 1985), 31–42.Google Scholar