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Follow the money: Investor trading around investor-paid credit rating changes

Author

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  • Bhattacharya, Utpal
  • Wei, Kelsey D.
  • Xia, Han

Abstract

Using institutional equity trading data, we find that a set of small institutional investors consistently follow credit ratings issued by an investor-paid rating agency in their trading decisions. Although rating information is credit related, we find that these followers often respond more strongly to investor-paid ratings than to influential trading signals, such as earnings announcements, analysts' earnings forecast revisions, and recommendation changes. Followers outperform non-followers, and show improved trading performance after becoming followers. We conclude that investor-paid rating agencies offer small institutional investors a cost-effective alternative to in-house research.

Suggested Citation

  • Bhattacharya, Utpal & Wei, Kelsey D. & Xia, Han, 2019. "Follow the money: Investor trading around investor-paid credit rating changes," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 68-91.
    • Handle: RePEc:eee:corfin:v:58:y:2019:i:c:p:68-91
    DOI: 10.1016/j.jcorpfin.2019.04.008
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    More about this item

    Keywords

    Investor-paid credit rating agencies; Credit ratings; Capital market regulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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