“Banks’ Accounting Conservatism and Credit Rating Differences” by Dr. Mei CHENG
Dr. Mei CHENG
Associate Professor of Accounting
Eller College of Management
University of Arizona
For a sample of bank bonds, we find that Standard & Poor’s (S&P) consistently issues more unfavorable ratings than Moody’s Investors Service (Moody’s). When testing possible explanations, we do not find that the two rating agencies’ assignment of different weights to the same factors explains the pattern of S&P’s relatively unfavorable ratings. Instead, we find that banks exhibiting greater accounting conservatism as reflected through timelier loan loss provisions experience a reduced frequency and magnitude of unfavorable ratings from S&P compared to Moody’s. We also find that the effect of accounting conservatism in mitigating S&P’s relatively unfavorable ratings is more pronounced when banks have internal control weaknesses and less debt monitoring. Our paper provides new insights that information asymmetry is a significant driver of lopsided rating disagreement for bank holding companies.