Does Credit Rating Effectively Signal the Investors?

Abstract

Our paper examines the relation between the adjustment of Standard & Poor’s (S&P’s) credit rating and the likelihood of a firm with securities fraud litigation We find that the downgrade of credit rating was less (more) likely to occur prior to the lawsuit before (after) the Credit Rating Agency Reform Act of 2006 (CRARA 2006) was implemented Besides a securities fraud litigated firm with prior downgraded credit rating experienced relatively lower negative market reactions than those without downgrades Our findings provide some evidence to answer the recent debate whether credit rating releases useful information (U S Department of Justice 2013; Crabtree and Maher 2005; Yi and Mullineaux 2006) and helps public investors to realize the predictability of S&P’s credit rating on a firm’s financial reporting risk Our results support that the CRARA 2006 has improved the quality and timeliness of credit rating agencies and the downgrade of credit rating in fact signals capital market participants increased litigation risk of a firm

Date of Award	2014 Jul 25
Original language	English
Supervisor	Hua-Wei Huang (Supervisor)