2014/07/01 by Pepa Kraft · 205 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Accounting #Actuarial science #Audit #Balance sheet #Banking stability, regulation, efficiency #Bond credit rating #Business #Cash flow #Cash flow statement #Credit Risk and Financial Regulations #Credit rating #Credit reference #Credit risk #Debt #Economics #Finance #Financial Distress and Bankruptcy Prediction #Financial ratio #Financial statement #Leverage (statistics)
paper · doi:10.2308/accr-50858
published in The Accounting Review 90(2), 641-674 (American Accounting Association)
openalex publication_date 2014/07/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
ABSTRACT I examine a dataset of both quantitative (hard) adjustments to firms' reported U.S. GAAP financial statement numbers and qualitative (soft) adjustments to firms' credit ratings that Moody's develops and uses in its credit rating process. I first document differences between firms' reported and Moody's adjusted numbers that are both large and frequent across firms. For example, primarily because of upward adjustments to interest expense and debt attributable to firms' off-balance sheet debt, on average, adjusted coverage (cash flow-to-debt) ratios are 27 percent (8 percent) lower and adjusted leverage ratios are 70 percent higher than the corresponding U.S. GAAP ratios. I then find that Moody's hard and soft rating adjustments are associated with significantly higher credit spreads and flatter credit spread term structures. Overall, the results indicate that Moody's quantitative adjustments to financial statement numbers and qualitative adjustments to credit ratings enable it to better capture default risk, consistent with it effectively processing both hard and soft information.