• Effects of Bank Earnings Quality on Credit Ratings–Does Information Asymmetry Matter?

Abstract

This paper uses the long-term credit ratings issued by Standard and Poor’s from 86 countries during 2002–2008 as samples and investigates the effect of earnings quality on credit ratings and the effect of information asymmetry of a country on the relationship between earning quality and credit ratings. The results show: first, banks with worse earnings quality will be assigned a lower rating after controlling for the bank-specific and country-specific variables. Second, banks in countries with serious information asymmetry will aggravate the adverse effect of earnings quality on credit ratings. Third, consistent with previous studies, financial ratios are more relevant to the explanation of credit ratings in countries with less information asymmetry. By contrast, credit ratings are mostly determined by sovereign credit rating, bank size and earnings quality.

Keywords: Credit Rating, Earnings Quality, Information Asymmetry, Disclosure Quality,

Institutional Environment Quality