Financial reporting quality and uncertainty about credit risk among the ratings agencies

Abstract

I study whether financial reporting quality resolves uncertainty about credit risk by examining how it affects disagreement between rating agencies. I find better reporting quality is associated with less uncertainty about credit risk as captured by disagreement about ratings between the agencies. Further, my results are consistent with reporting quality becoming more important in reducing uncertainty when an agency does not have access to private information. Finally, I examine whether SFAS 142, which ended goodwill amortization and requires managerial estimates to determine potential impairments of goodwill, affected uncertainty about credit risk. I find increased uncertainty between agencies about the goodwill account for firms with significant goodwill after the implementation of SFAS 142. I contribute to the literature on the role of reporting quality in debt markets and on debt market information intermediaries.