Analyst Distance and Credit Rating Consistency

Abstract

We investigate the effect of analyst distance in the credit rating industry and show that issuers with analysts located in more distant offices have lower default rates than issuers with closer analysts and the same rating. Our results are robust to an analyst home bias and suggest that more distant analysts are subject to a local informational disadvantage when conducting their rating analysis. Given an asymmetric reputational cost function that implies penalizing an overestimation of credit quality more heavily than an underestimation, we can demonstrate that it is rational for analysts to assign more conservative ratings for higher levels of information uncertainty.