Are Credit Ratings Subjective? The Role of Credit Analysts in Determining Ratings

Credit ratings affect firms’ access to capital and investment choices. We show that the identity of the credit analysts covering a firm significantly affects the firm’s rating, comparing ratings for the same firm at the same time across agencies. Analyst effects account for 30% of the within variation in ratings. Moreover, the rating biases of analysts carry through to credit spreads on the rated firms’ outstanding debt and the terms offered on new public debt issues. As a result, firms covered by more pessimistic analysts issue less debt, lean more on cash and equity financing, and experience slower revenue growth than firms covered by optimistic analysts. We also find that the quality of ratings varies with observable analyst traits. Analysts with MBAs provide less optimistic and more accurate ratings; however, optimism increases and accuracy decreases with tenure covering the firm, particularly among information-sensitive firms. JEL codes: G24, G32, G02, G12