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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
Barakat, Ahmed
Ashby, Simon
Fenn, Paul
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2018
Journal
International Review of Financial Analysis
Book
Publication Volume
55
Publication Issue
1
Publication Begin page
1
Publication End page
22
Publication NUmber of pages
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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.
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Keywords
Reputational Risk, Operational Risk, Financial Analysts, Stock Recommendations, Credit Ratings, Financial Institutions