Qualitative Corporate Disclosure and Credit Analysts’ Soft Rating Adjustments

Several factors comprise the credit ratings analysts publicly report. While academics have extensively studied the quantitative models credit analysts employ, far less is known about the qualitative adjustments analysts make to their models’ outputs (“soft adjustments”). We examine whether and how credit analysts employ credit-relevant qualitative disclosure in making their credit risk assessments. Our results indicate that credit analysts impound the information conveyed by firms’ qualitative disclosure in their publicly-reported ratings. Our results further suggest that the “soft”, but not “hard”, adjustments are the mechanism by which the information in qualitative disclosure is impounded into the rating. While disclosure opacity plays a relatively minor role in analysts’ use of soft information, the extent of numerical disclosure that accompanies qualitative disclosure appears to convey precision and credibility. We then analyze the informativeness of credit rating changes that involve soft adjustments following Jorion et al. (2005). We find that credit rating changes that involve soft adjustments are more informative than those that do not; however, the increase in informativeness diminishes after the repeal of the Regulation Fair Disclosure exemption for credit rating agencies. ∗We would like to thank participants of the NYU Stern brownbag for helpful comments and suggestions. We are grateful to Patrick Pfeifer for research assistance. We appreciate funding from Fisher College of Business Ohio State University and NYU Stern School of Business.