Follow the Money: Investor Trading Around Investor-Paid Credit Rating Changes

We examine which, how, and why institutional investors – the ultimate consumers of credit ratings – are influenced by investor-paid credit ratings. Using institutional equity trading data, we identify some institutional investors who consistently trade on ratings issued by EJR – an investor-paid rating agency. Though EJR’s advice is credit-related, we find that these EJR followers often respond more strongly to EJR ratings than to influential equity trading signals like earnings announcements and sell-side analyst recommendations. Ultimately, followers, by putting their money where EJR’s mouth is, benefit from EJR’s advice: they outperform non-followers, and show improved trading performance after becoming followers.