Ryan D. Israelsen

Credit Ratings and the Cost of Municipal Financing

A common belief held among researchers and policy makers is that regulatory reliance has inflated market demand for credit ratings, despite their decreasing informational value. Advances in information technology, coupled with reputation losses following the subprime crisis, renew the question of whether investors still rely on ratings to assess credit risk. Using Moody’s 2010 scale recalibration, which was unrelated to changing issuer fundamentals, we find that ratings still matter to investors and to issuers—apart from any regulatory implications. Our results commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes. Received October 9, 2015; editorial decision June 7, 2017 by Editor Andrew Karolyi.

Predictability in Equilibrium: The Price Dynamics of Real Estate Investment Trusts

This research hypothesizes that, in markets where information costs, transaction costs and the economic impact of information can vary widely, we should expect predictability to vary systematically. We test this hypothesis with data on equity real estate investment trusts (REITs) from 1985 to 1992. We document that levels of predictability vary with firm characteristics like leverage, size and focus. Momentum is stronger for larger, more levered REITs. Reversion is faster for focused, levered REITs. The results are consistent with the hypothesis that, in equilibrium, securities, where information is either less costly to acquire or has less impact on fundamental value, should exhibit less predictability.

Where the Heart Is: Information Production and the Home Bias

We examine credit ratings to shed new light on competing hypotheses in the home bias literature. We find that credit analysts who grew up in the state of the issuer award more favorable ratings than analysts who grew up outside the state. This effect is increasing in credit risk, reduces new issue credit spreads, and expands affected issuers’ debt capacity. Because this effect is driven by where analysts grew up, not by where they reside while producing ratings, we conclude that our results reflect home bias rather than superior information. Tests of timeliness and symmetry in rating updates by home and outside analysts further support this conclusion. We also find that analysts’ early life experiences influence the magnitude of the home bias. Overall, this paper shows that home bias exists among information producers, not just investors, and has real economic effects.

Does SEC Form 8-K Provide Information Necessary or Useful for the Protection of Investors?

The extant literature provides evidence that, for many SEC 8-K filings, there is a significant market reaction on the date of the event that led to the 8-K filing, on the days between the event date and the filing date and on the filing date. We address the question, who pays attention and who trades on these days – institutional investors, retail investors, or both? We show that there is significant abnormal attention paid by institutional investors on both the filing date and the event date, more so on the event day; but there is no obvious pattern of abnormal attention from retail investors on either of these dates. Moreover, most price discovery occurs during the pre-filing period when institutional investors are paying attention; suggesting that the 8-K filing has less informational benefit, particularly to retail investors. We observe, for several events related to company senior management, that the 8-K filings appear to attract media coverage and retail attention, which has the undesirable consequence of price pressure on the filing date and this price change eventually reverts.

How Quickly do Equity Prices Converge to Intrinsic Value

This research hypothesizes that in markets where information costs, transactions costs and the economic impact of information can vary widely, we should expect both significant predictability and systematic variation in the predictability. Controlling for other factors, we find that on average, 15-30% of the difference between the stock price and the estimated intrinsic value is removed in a year. We document that levels of predictability vary with firm characteristics like leverage, size and number of analysts. Momentum is stronger for larger firms with more analysts. Reversion to the intrinsic value is greater for smaller firms with more analysts.