DESARROLLO DE LAS PRÁCTICAS

The remainder of my analyses to test the news effect of accounting quality

focuses on testing rating timeliness. When a borrower experiences a significant change in default risk, rating agencies should respond with a rating change. A more timely response is a signal of higher rating quality. This is a more powerful setting to test the effects of earnings quality, because earnings itself is a measure of the change in (as opposed to the level of) a company’s financial position. To test the responsiveness of credit ratings to changes in default risk, I utilize the modified Campbell failure score as a benchmark measure of default risk.

To test the timely downgrade or upgrade by the rating agencies following a change in default risk, I examine six dependent variables: ejrdown, spdown, ejrup, spup, downdiff, and updiff. The first two are indicators equal to one if the firm experiences a downgrade from EJR and S&P, respectively. The next two are similar indicators of upgrades. The variable downdiff (updiff) is equal to one if the firm is downgraded (upgraded) by EJR and not by S&P, negative one if the firm is downgraded (upgraded) by S&P and not EJR, and zero otherwise. These variables are regressed in a linear

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probability model on a number of independent variables in Table 8. AQ is the accounting quality variable: TLR in Panel A, ATLR in Panel B, and DiscAcc in Panel C. Csup is an indicator equal to one if the rated firm experiences an increase in default risk, as

measured by the failure score. The key variable in the downgrade specifications is the interaction of these two variables, AQ_csup. For TLR and ATLR, I expect a positive coefficient on this interaction. This would indicate that a rated entity with more

informative earnings is more likely to be downgraded when their default risk increases. This would be because the increase in default risk is more likely to be reflected in earnings for firms with timely loss recognition. For DiscAcc, I expect a negative coefficient, as upward earnings management can obscure the increase in default risk. In the upgrade specifications, the key variable is AQ. This measures the incremental effect of accounting quality on the probability of an upgrade when there is a decrease in default risk. For TLR, there is no directional prediction for this coefficient, as this measure does not capture the timeliness of earnings with respect to good news. For ATLR, the

coefficient should be negative because of the downward bias in earnings. For DiscAcc, the coefficient should be positive because upward earnings management may exaggerate the improvement in credit risk. I include as control variables campscore_lag, which is the lagged failure score level, and ejrating_lag, sprating_lag, and ejrmsp_lag, which are the lagged levels of EJR rating, S&P rating, and the difference between the two, respectively.

Table 6, Panel A presents the results for timely loss recognition. The positive coefficient on csup in the ejrdown and spdown columns indicates that, consistent with expectations, rating downgrades are more likely for both rating agencies when the firm

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experiences an increase in default risk. The positive coefficient on csup in the downdiff column indicates that EJR is more likely than S&P to issue a downgrade when default risk increases, consistent with the overall evidence that EJR ratings appears to outperform S&P ratings as measures of default risk. The key coefficient on the interaction term is positive and significant for both EJR and S&P downgrades, indicating that more timely loss recognition increases the probability that the agencies appropriately record a downgrade when default risk increases. The interaction term is not significant in the downdiff column, indicating that the effect of accounting quality on rating timeliness is not significantly different between the two rating agencies.

Panel B presents the results for asymmetric timely loss recognition. For

downgrades, the results are similar to those from Panel A and support the hypothesis that ATLR will improve the timeliness of ratings in recording rating downgrades when issuers have an increase in default risk. For upgrades, the effects of ATLR are mostly

insignificant, consistent with our earlier finding that upgrades are less timely and, therefore, are less likely to be influenced by the characteristics of current earnings.

Panel C provides results related to discretionary accruals. In the ejrdown and spdown columns, the negative coefficients on the interaction termsshow that the probability of a downgrade concurrent with an increase in default risk declines as discretionary accruals become more positive. This is consistent with my hypothesis. As expected, the results for EJR and S&P upgrades are weaker, though it is notable that the interaction term is positive, indicating that firms that manage earnings upward when they

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experience an increase in default risk are more likely to receive a rating upgrade, which would also be consistent with rating agencies being misled.

2.3.4 Controlling for conflicts of interest and private information