The Relation between Accruals Quality and Split Bond Ratings: Focusing on the Effect of Information Environment

This study examines the effect of information environment on the relation between accruals quality and disagreement among credit rating agencies. While the literature on the effect of information risk on the equity market is replete, more research on the debt market is called for. In this study, I examine how the level of information environment proxied by information risk affects the way ratings agencies determine bond ratings based on accounting quality (i.e., accruals quality). Information risk is captured by four proxies: delisted status (delisted), private placement (privatepl), negative profitability (roa_opp), and the extent of variation in return on assets (stdroa). Using a sample of Korean data consisting of 1,870 observations, I find that the relation between accruals quality and split bond ratings is pronounced for firms with higher information risk. Additionally, the main results are robust to the use of individual measures of accruals quality, the use of alternative measure of split bond ratings, exclusion of the influence of major economic events such as the Enron incident or the Global Financial Crisis, the use of matched sample based on entropy balancing and inclusion of additional variables. In summary, I find that the negative impact of poor accruals quality on the rating process is accentuated for firms with a lack of accessibility to information and with difficulties in assessing a firm’s performance.