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Asymmetric Watch Decisions before Downgrades and Upgrades: Evidence on Conservatism of Certified Credit Rating Agencies
Yinqing Zhao,
Carnegie Mellon University
ABSTRACT. Certified credit rating agencies issue credit watches to warn about changes in firms’ creditworthiness and possible future rating changes. More rating downgrades are preceded by credit watches than rating upgrades, consistent with the rating agencies being conservative, that is, responding more quickly to bad news than to good news. Downgrades are more likely to be preceded by credit watches than upgrades when (1) the ratings are of investment grade, (2) there are rating triggers, and (3) the issuer’s securities-related litigation risk is high. Rating agencies’ conservatism, like accounting conservatism, is motivated by contracting and litigation.
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