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The reputational effects of analysts' stock recommendations and credit ratings: evidence from operational risk announcements in the financial industry

Barakat, Ahmed; Ashby, Simon; Fenn, Paul

Authors

AHMED BARAKAT Ahmed.Barakat@nottingham.ac.uk
Assistant Professor in Banking

Simon Ashby

Paul Fenn



Abstract

This paper investigates whether more favorable stock recommendations and higher credit ratings serve as a reputational asset or reputational liability around reputation-damaging events. Analyzing the reputational effects of operational risk announcements incurred by financial institutions, we find that firms with a “Buy” stock recommendation or “Speculative Grade” credit rating are more likely to incur an equity-based reputational damage. In addition, firms with lower credit ratings incur a much more severe debt-based reputational damage. Moreover, credit ratings are more instrumental in mitigating the debt-based reputational damage caused by fraud incidents or incurred in non-banking activities. Furthermore, the misconduct of senior management could demolish the reputation of firms with less heterogeneous stock recommendations. Finally, credit ratings serve as an equity-based reputational asset in the short term but turn into an equity-based reputational liability in the long term. Overall, our analysis reveals that stock recommendations represent a reputational burden and credit ratings act as a reputational shield; however, the persistence and magnitude of such reputational effects are moderated by time and event characteristics.

Citation

Barakat, A., Ashby, S., & Fenn, P. (2018). The reputational effects of analysts' stock recommendations and credit ratings: evidence from operational risk announcements in the financial industry. International Review of Financial Analysis, 55, https://doi.org/10.1016/j.irfa.2017.10.011

Journal Article Type Article
Acceptance Date Oct 27, 2017
Online Publication Date Oct 28, 2017
Publication Date Jan 31, 2018
Deposit Date Nov 23, 2017
Publicly Available Date Apr 29, 2019
Journal International Review of Financial Analysis
Print ISSN 1057-5219
Electronic ISSN 1057-5219
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 55
DOI https://doi.org/10.1016/j.irfa.2017.10.011
Keywords Reputational risk; Operational risk; Financial analysts; Stock recommendations; Credit ratings; Financial institutions
Public URL http://eprints.nottingham.ac.uk/id/eprint/48338
Publisher URL https://doi.org/10.1016/j.irfa.2017.10.011
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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