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Do Rating Agencies Fully Understand the Information in Accruals and Cash Flows about Future Earnings?”

Choi, Sunhwa (2011) Do Rating Agencies Fully Understand the Information in Accruals and Cash Flows about Future Earnings?”. Working Paper. Lancaster University, Lancaster. (Unpublished)

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Abstract

Although credit rating agencies explicitly claim that they value cash flows than earnings, I find that earnings are more strongly related to credit ratings than cash flows, as accrual-based earnings incorporate bad news early and mitigate timing and matching problems. More interestingly, earnings information is not fully incorporated in credit ratings. As a result, future rating changes can be predicted using current earnings information. Also, credit rating agencies do not distinguish the differential persistence of accruals and cash flow components of earnings. Additional tests suggest that this inefficiency in ratings with respect to accounting information is due to information uncertainty, the contractual use of ratings, and potential conflicts of interest. However, the predictability of future rating changes by current earnings has disappeared in the post-crisis period as regulations on the rating industry have been tightened.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: credit ratings ; earnings ; accruals ; cash flows ; efficiency
Subjects: H Social Sciences > HG Finance
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 56185
Deposited By: ep_importer_pure
Deposited On: 17 Jul 2012 16:52
Refereed?: No
Published?: Unpublished
Last Modified: 10 Apr 2014 02:42
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/56185

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