The Effect of Accruals Quality on Split Bond Ratings

This study examines whether good accruals quality is associated with less disagreement among credit rating agencies. Distinct from prior studies that focus on equity analysts, I examine how the quality of financial information influences rating agencies in determining bond ratings. Precise accounting information reduces the information risk of the users of the financial statements such as the credit rating agencies, and thereby affects the frequency and magnitude of split bond ratings by credit rating agencies. Specifically, this paper examines whether the quality of accounting information, proxied by accruals quality, reduces disagreement about bond ratings (i.e., split bond ratings) among the three rating agencies in Korea. I test the hypothesis which predicts that poor accruals quality raises information uncertainty about a firm’s financial condition for creditors, thereby increasing split bond ratings among rating agencies. Using 1,867 observations for public bonds in Korea, I show that better accruals quality is associated with lower frequency and magnitude of split bond ratings by credit rating agencies. This finding persists after controlling for other firm-specific factors that affect split ratings, and is robust to a battery of sensitivity analyses.