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

• Main Authors: EDERINGTON, Louis H., GOH, Jeremy C.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1998
• Subjects: Net income; Earnings forecasting; Analytical forecasting; Forecasting models; Bond rating; Coefficients; Causality; Finance; Stock analysis; Forecasting techniques; Corporate Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2200; https://ink.library.smu.edu.sg/context/lkcsb_research/article/3199/viewcontent/BondRatingAgenciesStockAnalysts_1996_pp.pdf
• Institution: Singapore Management University

Both bond ratings agencies and stock analysts evaluate publicly traded companies and communicate their opinions to investors. Comparing the timelines of each, it is found that Granger causality flows both ways. While most bond downgrades are preceded by declines in actual and forecasting 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. Little change is found in actual earnings following upgrades. Analysts, however, tend to increase their forecasts of future earnings.