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.
DOI
10.1016/j.irfa.2017.10.011
Publication Date
2018-01-01
Publication Title
International Review of Financial Analysis
Volume
55
Publisher
Elsevier
ISSN
1057-5219
Embargo Period
2024-11-19
First Page
1
Last Page
22
Recommended 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, pp. 1-22. Elsevier: Available at: https://doi.org/10.1016/j.irfa.2017.10.011
