Credit Rating Agencies and Accounting Fraud Detection - Archive ouverte HAL Access content directly
Preprints, Working Papers, ... Year :

Credit Rating Agencies and Accounting Fraud Detection

, (1) ,
1
Allen Huang
  • Function : Author
Shiheng Wang
  • Function : Author

Abstract

This study examines whether and when credit rating agencies (CRAs) take negative rating actions against issuers committing accounting fraud before the fraud is publicly revealed and the economic impact of such rating actions. Our findings show that these fraud firms experience a greater number of negative rating actions during the four quarters prior to the public fraud revelation, including lower ratings, more rating downgrades, and more negative credit watch additions, compared to firms with similar economic fundamentals and stock performance. Our findings also show that such negative rating actions are not limited to fraud firms in financial distress, suggesting that our effect reflects CRA responses to accounting fraud per se. In addition, we find CRAs take more timely actions when frauds are more severe, when they involve accounts more often scrutinized by CRAs during their credit analysis, and when short sellers target firms. Last, we find that CRAs’ negative rating actions against fraud firms are informative to the market and are associated with shorter fraud duration. Overall, we conclude that CRAs possess private information about accounting fraud prior to the public revelation of this fraud and that they incorporate this information into negative ratings actions, accelerating fraud discovery.
Not file

Dates and versions

hal-02896488 , version 1 (10-07-2020)

Identifiers

Cite

Allen Huang, Pepa Kraft, Shiheng Wang. Credit Rating Agencies and Accounting Fraud Detection. 2020. ⟨hal-02896488⟩

Collections

HEC
18 View
0 Download

Altmetric

Share

Gmail Facebook Twitter LinkedIn More