Analysts who judge companies for credit risk can't escape their own political bias in rating bonds, a new research paper says.
Those who aren't affiliated with the political party of the sitting U.S. president are more apt to downgrade corporate credit ratings, according to the study from the University of Chicago and Cornell University. The researchers found that the effect is more pronounced during times of high partisanship and for analysts who vote frequently.
"Using a novel dataset that links credit rating analysts to party affiliations from voter registration records, we show that analysts who are not aligned with the president's party are more likely to adjust ratings downward," Elisabeth Kempf of the University of Chicago and Margarita Tsoutsoura of Cornell wrote.
The implications of such biases, even if unintentional, are notable and can have a real influence on the financial health of companies, the economists said. Lower credit ratings raise the cost of borrowing, for example.
Consistent with prior studies, Kempf and Tsoutsoura demonstrate that a credit downgrade cuts the company's stock an average of 1.8 percentage points. And, they said, the market doesn't pay attention to these political affiliations.
"We find little evidence that the stock price response to a downgrade differs significantly when the downgrade is announced by an analyst who is ideologically misaligned with the president," the researchers wrote. "The stock market does not seem to correct analysts' ideological bias."