Paula Hill

The Market Impact of Relative Agency Activity in the Sovereign Ratings Market

Using a sample of 101 countries, over the period 1990 to 2006, we assess the relative credit-rating activity of the major agencies at the sovereign level. Informed by this preliminary analysis, we then examine the market impact of rating actions (ratings changes, watch procedures and outlooks), allowing for various interactions across raters and rating events. Additionally, we carry out a separate analysis of crisis periods. We find that Standard and Poors tend to be more active, provide more timely rating assessments and offer more new information than either Fitch or Moodys. We find evidence of specialisation, however, among agencies, with Moodys, for example, being the leading agency among IMF advanced economies. In line with our rating activity analysis, we find some evidence of stronger reaction to changes in Standard and Poors rating assessments than in those of the other agencies. We also find evidence that credit-outlook and credit-watch events are more timely and more informative than downgrades and upgrades, and that, as anticipated, reactions are stronger during crisis periods, but that events remain informative outside crisis periods.

Risk Disclosures on the Second Tier Markets of the London Stock Exchange

The identification, management and disclosure of risks have been the subject of recent legislation, directives and reporting standards issued across a number of international jurisdictions. To inform the disclosure debate, this paper provides a detailed analysis of the risk warning disclosures of initial public offering (IPO) companies and the factors that drive such disclosures. We find that risk disclosures of IPO companies contain a greater proportion of forward-looking information but a lower proportion of information on internal controls and risk management than the disclosures of listed companies. We find evidence that such disclosure has increased across time but that larger directors’ shareholdings are associated with a reduction in risk disclosure.

Market feedback, investment constraints, and managerial behavior

This paper examines the joint role of market feedback and investment constraints on managerial behavior. Using a sample of UK fixed price initial public offerings, we show that underperformance of share returns at the IPO significantly affects managerial investment decisions in the period after the offering. Firms with better investment opportunities and proportionately lower fixed (higher intangible) assets are more sensitive to negative market feedback. Over the longer term, the more responsive firms perform significantly better than their non-responsive counterparts. The findings contribute to the debate on the informational advantage of managers over investors and present strong evidence that the market, on aggregate, can provide a superior assessment of a firms opportunities. Managers who are able to respond to negative market feedback can significantly improve their firms future prospects.

The use of earnings and operations management to avoid credit rating downgrades

Firms placed on negative credit watch face the threat of a credit rating downgrade. At the same time, they are given the opportunity to put recovery efforts in place to retain their current credit rating. In this paper, we test to what extent firms use earnings management as a short-term recovery strategy. We find that both accruals-based and real earnings management are associated with firms avoiding credit rating downgrades, and that these alternative earnings management strategies tend to be complements rather than substitutes. However, following the passage of the Sarbanes–Oxley Act, only real earnings management is significantly associated with the credit watch outcome. We find evidence that firms which maintain their rating via earnings management are better able to afford the inevitable earnings reversals, and that in the year following the credit watch period, the credit rating performance of these firms is significantly better than firms which undergo a downgrade, with fewer downgrades and more upgrades in this period. Our results also imply that credit rating agencies are not misled by earnings management but rather allow for some discretion in reporting earnings that facilitates the dissemination of private information about future firm performance.

Political Uncertainty Exposure of Individual Companies: The Case of the Brexit Referendum

This paper studies cross-sectional determinants of the exposure of U.K. firms to Brexit, an event which resulted in an unprecedented rise in political uncertainty. We find that internationalization has a moderating effect on Brexit exposure which goes beyond the pure currency translation effect and is consistent with international activities acting as a diversification mechanism for domestic risks. We also provide some indicative evidence that high-growth firms are more affected by Brexit. At the industry level, we show that Financials and firms in the consumer-facing sectors have the highest exposure to Brexit-related uncertainty. Knowledge of the variation in exposure of individual firms and sectors to political uncertainty associated with major political events can assist managers, investors and policymakers in taking remedial actions to limit its impact.

Relative Bias in Sovereign Credit Risk Spill-over to Domestic Firms

In this paper, we investigate the spill-over of sovereign rating changes into the corporate sector across 34 countries, with a primary focus on the relative effects of positive and negative events. Positive or negative bias of such spill-overs could impact the relative speed and depth of recessions versus recoveries. We find that such bias varies across countries. Our results also show considerable variation in total (positive and negative) spill-over; the spill-over rates can partly be explained by firm and sovereign level characteristics, with firms rated at parity with the sovereign particularly affected by both positive and negative spill-over in both investment and sub-investment grade rated sovereigns.

Financial Distress Risk, Executive Compensation and the Executive Labour Market

This paper analyses the effect of financial distress risk on the initial compensation contracts of new executives in the UK, where credit markets are more concentrated than in the US. We find that financial distress risk has a negative and statistically significant impact on the level of cash-based compensation and total compensation of executives, who are newly hired from either outside or inside the firm. This negative impact is accentuated in firms with a high fraction of bank debt, suggesting that banks, as creditors, provide monitoring and influence initial executive compensation packages in firms with high financial distress risk. Additionally, we find that financial distress risk has a negative and significant impact on the fraction of equity-based compensation for both externally and internally appointed executives.