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

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: https://nottingham-repository.worktribe.com/output/907545
• Publisher URL: https://doi.org/10.1016/j.irfa.2017.10.011