Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)

Graduate Group


First Advisor

Catherine Schrand


This study examines whether the quality of borrowers' accounting information determines the accuracy and timeliness of credit ratings issued by rating agencies. I consider two possible effects. The news effect implies higher quality accounting provides better information to credit rating agencies, enabling them to develop better ratings. The discipline effect describes how the disclosure of financial information, particularly that which recognizes bad news in a timely manner, can limit rating agencies' ability to issue inflated ratings to appease their clients. I further explore whether these effects vary with the characteristics of private information, which can influence both the incremental news provided by accounting information and the agencies' inclination to issue inflated ratings. I utilize rating data from two major agencies: Standard & Poor's (S&P), an issuer-paid agency that obtains private information and may have incentives to cater to issuers; and Egan-Jones Ratings Company (EJR), an investor-paid agency that relies solely on public information to develop its ratings. The differences between these agencies make EJR an effective control group for the identification of the accounting quality effects. I measure the quality of credit ratings by their ability to predict default and measure changes in default risk in a timely and accurate manner. I find that debt issuers with earnings that exhibit more timely loss recognition and asymmetric timely loss recognition have credit ratings that predict default more accurately and are downgraded more promptly. I also find that issuers with upward-managed earnings have less timely rating downgrades. These effects are comparable for both rating agencies for a broad set of firms, but they are more pronounced for EJR ratings relative to S&P ratings for firms near default, when agency reputation costs and information value are high. Conflicts of interest and private information do not predictably modify the effects of accounting quality on credit rating quality. The results support the existence of the news effect of accounting quality but provide limited evidence of the discipline effect or the moderating impact of private information.

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Accounting Commons