Abstract
While academics have extensively studied quantitative models of credit risk, far less is known about credit analysts’ behind-the-scenes adjustments to the ratings generated by their models. Using both dictionary-based and topic modeling approaches, we examine whether and how credit analysts use borrowers’ qualitative disclosures to extract information pertaining to credit risk in making their assessments. We decompose publicly-available ratings into qualitative factors (soft adjustments) and quantitative factors (hard adjustments) and find that credit analysts’ soft adjustments, but not the hard adjustments, reflect information in borrowers’ qualitative disclosures. Our results further indicate that the association between firms’ qualitative disclosures and soft adjustments increases with the intensity of the rating agency’s reliance on public disclosure. We also examine whether analysts’ use of credit risk-relevant information from borrowers’ qualitative disclosures render ratings more credible and thus informative. We find that the credit rating downgrades of borrowers that provide more qualitative disclosures are more informative than those that do not; however, the increase in informativeness diminishes after the Dodd-Frank Act, when the legal liability for credit rating agencies increased.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.