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

Barakat, Ahmed and Ashby, Simon and Fenn, Paul (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 . pp. 1-22. ISSN 1057-5219

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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.

Item Type: Article
RIS ID: https://nottingham-repository.worktribe.com/output/907545
Keywords: Reputational risk; Operational risk; Financial analysts; Stock recommendations; Credit ratings; Financial institutions
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > Nottingham University Business School
Identification Number: https://doi.org/10.1016/j.irfa.2017.10.011
Depositing User: Eprints, Support
Date Deposited: 23 Nov 2017 11:00
Last Modified: 04 May 2020 19:28
URI: http://eprints.nottingham.ac.uk/id/eprint/48338

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