Investor biases in Japan: Another pathology of Keiretsu

We examine how keiretsu-related institutional investors behave in the Japanese stock market relative to other investor categories for the period from 1985–1998. Based on the agency problem hypothesis for the general bias of institutional investors and the relational distance hypothesis for the unusual bias of keiretsu-affiliated money managers, this paper finds that keiretsu-affiliated money managers over-invest not only in large firms, but also in imprudent firms. The group affiliation of Japanese domestic money managers may drive their portfolio decisions towards financially weak group member firms at the expense of their client investors. Identifying the conditions for this rescue type of investment, we illustrate a rather weak corporate governance foundation of institutional money management in Japan.     

Rating Agency Reputation,the Global Financial Crisis,and the Cost of Debt

Why do foreign firms obtain credit ratings by global rating agencies rather than from their home country's rating agencies even though global raters typically assign lower credit ratings when these foreign firms issue bonds in their home currencies? We find that bonds rated by a global agency decreased yields 11‐14 basis points (bps) when compared to those rated by Japanese rating agencies but, during the 2007‐2009 financial crisis, the yields on these Japanese bonds increased 12‐17 bps, thus fully negating the advantage of obtaining a bond rating from a global rater. This suggests that the reputation of global rating agencies declined during the 2007‐2009 crisis period.     

The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?

In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades, leading some to conclude that the credit quality of U.S. corporate debt has declined. However, an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings. An ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards.     

Japanese Corporate Groupings (Keiretsu) and the Characteristics of Analysts' Forecasts

This study examines differences in the characteristics of analysts' forecasts of earnings for keiretsu and non-keiretsu firms in Japan. Japanese industrial organization is characterized by enterprise groupings, keiretsu, composed of firms in different industries, but interrelated through cross-holdings of ownership. The strong interrelations of the Japanese keiretsu have been shown to increase the monitoring of managerial performance. An alternative view of keiretsu stewardship suggests the exclusionary environment within a keiretsu creates an information monopoly, resulting in greater information asymmetry between inside and outside constituents. These two views provide opposing predictions on how keiretsu groupings potentially affect the characteristics of earnings forecasts made by analysts: increased monitoring will improve the forecast characteristics of earnings, while the opposite is true under an information monopoly.Our results suggest that forecast accuracy (dispersion) is higher (lower) for keiretsu firms than non-keiretsu firms, supporting a monitoring role by keiretsu. The results also show that keiretsu firms' forecast characteristics are related to the strength of the keiretsu relationship, providing further evidence that it is indeed the keiretsu relationship that increases the monitoring of management, which ultimately improves the accuracy and dispersion of analysts' forecast.     

债券评级机构变更——基于评级选购与评级迎合视角

本文以2008年至2017年的公司债券为样本,研究了发行人变更评级机构的影响,以此来解释评级市场上发行人频繁变更评级机构的现象。本文发现发行人变更评级机构后,其信用等级得到显著提升。发行人变更评级机构的行为对信用等级的影响在以下两种情形中更显著:一是当发行人所处行业或评级机构所在的评级市场竞争激烈时;二是当发行人主体评级位于AA信用等级的临界点时。进一步研究发现,考虑到评级机构变更与信用等级之间的交互影响,变更评级机构的发行人整体上可实现发债成本的降低。但该类发行人未来的违约风险增加、经营业绩下降。最后,本文发现债券发行规模较大以及非国有发行人更倾向于变更评级机构来提高信用等级。本文通过分析发行人更换信用评级机构的动机和后果,为监管部门构建以评级质量为导向的良性竞争环境提供借鉴参考。     

Does the Dodd-Frank Act reduce the conflict of interests of credit rating agencies?

I compare issuer-paid ratings, represented by Standard & Poor's (S&P) to investor-paid ratings, represented by Egan-Jones Ratings Company (EJR), after the passage of the Dodd-Frank Act. My results show that S&P ratings are lower than EJR ratings in the post-Dodd-Frank period, especially for firms able to generate revenue to credit rating agencies (CRAs); i.e., firms with a large bond issuance, larger firms, and low-performing firms. Further, I find evidence of a greater accuracy of S&P ratings relative to EJR ratings in the post-Act period as shown by the lower probability of large credit rating changes and rating reversals. Finally, I show that issuer-paid ratings are more concerned about providing timely ratings in the post-Dodd-Frank period, thus protecting their reputation as leading information providers, than investor-paid ratings. My results are robust to a wide battery of robustness tests.     

Differences of opinion and selection bias in the credit rating industry

Many regulations use private sector credit ratings to determine investment prohibitions and capital requirements for institutional portfolio investments. These regulations implicitly assume that different agencies have equivalent rating scales, despite the fact that some agencies assign systematically higher ratings than others. We assess the appropriateness of these regulatory practices by testing whether observed rating differences reflect different rating scales or simply result from sample selection bias. Our analysis reveals only limited evidence of selection bias. We also ask what types of firms of firms are most likely to seek ratings from the agencies with higher rating scales. Our analysis uncovers no evidence that firms seek ratings from these agencies to clear specific regulatory hurdles or to reduce ex ante uncertainty about default risk.     

Political similarities in credit ratings

We investigate whether political similarities between credit rating agencies (CRAs) and bond issuers impact credit rating quality. We find that a higher degree of similarity of political affiliation leads to a decrease in timeliness and accuracy of downgrades prior to default events. Our finding supports the notion that CRAs tend to maintain/assign preferential ratings to politically similar firms via delaying negative signals as favourable rating activities. We further show that these politically similar firms tend to increase the proportion of donations to their favoured party following favourable credit ratings. Interestingly, this result is confined to Republican-leaning firms. The results indicate that CRAs successfully use biased credit ratings as an indirect channel of political party support. Our findings support the political similarities in credit ratings hypothesis.     

Competition in the credit rating Industry: Benefits for investors and issuers

We empirically investigate the benefits of multiple ratings not only at issuance of debt instruments but also during the subsequent monitoring phase. Using a record of monthly credit rating migration data on all U.S. residential mortgage-backed securities rated by Standard & Poor's, Moody's, and Fitch between 1985 and 2012 (154,600 tranches), our results provide empirical evidence that rating agencies put more effort in rating and outlook revisions when tranches have assigned multiple ratings. Furthermore, we see that in the case of multiple ratings, agencies do a better job in discriminating tranches with respect to default risk. On the downside, we observe a shift in collateral towards senior tranches and incentives for issuers to engage in rating shopping activities, but find no evidence that rating agencies exploit such behavior to attract more rating business. Our results contribute to the literature on information production of credit ratings and extend the perspective to the monitoring period after issuance.     

Do managers withhold bad news from credit rating agencies?

Research documents that managers, on average, withhold bad news and emphasize good news in their public disclosures. We ask whether the same is true in their private communications with credit rating agencies. We study how rating agencies anticipate and react to public information events as a function of their access to rated firms’ private information. We show that, in terms of ratings downgrades, rating agencies exhibit relatively more anticipation and less reaction to negative (compared to positive) public information events when they have more access to private information. Our results are strongest when firms are most optimistic in their public disclosures and are not due to rating agencies focusing their efforts on downside risk. Overall, we find consistent evidence that rated firms provide less optimistic information to rating agencies in their private communications and that this information is reflected in credit ratings.

     

Reactions of Japanese markets to changes in credit ratings by global and local agencies

We examine data from the mid-1980s to 2003 to investigate whether stock prices set on the Tokyo Stock Exchange for Japanese firms react more strongly to changes in credit ratings of global rating agencies than of local agencies. This offers a strong test of relative influence of the two groups of rating agencies. We hypothesize that global raters will have more influence, but given that the two global agencies, Moody’s and Standard and Poors, are headquartered in the United States, analysis of stocks of Japanese firms listed on US exchanges would confound the results to the extent there is a home bias for raters. We find that global agencies are more influential than the two major local raters, Japan Rating and Investment Information and Japan Credit Rating Agency, for rating downgrades. Thus for credit downgrades, global raters are more influential than local ones even in the local market. Consistent with previous research, we find that upgrades are benign events, and this holds true for global as well as local agencies.     

评级膨胀、双评级规范的网络效应与美国信用评级霸权

与通货膨胀一样,评级膨胀具有持久的、螺旋上升的和影响深远的危害性。信用评级在本质上只是一个相对风险措施,典型的信用评级并不能完全反映宏观经济周期。对国家和投资者来说,信用评级所导致的风险与威胁主要来自于＂信用评级膨胀＂。而究其根本,评级膨胀的大规模泛滥最终得益于美国两大评级机构的双评级规范霸权,以及由美国评级机构所垄断的国际评级网络。由于存在激励促使他们逃避基于评级的监管,因此道德风险在所难免,并一定会催生评级膨胀。因此,评级膨胀只是表象和媒介,双评级规范和网络效应才是美国评级霸权的最终顶点。     

Rating shopping and rating inflation in Israel

Firms may exploit the option of choosing among different rating agencies in order to pick the highest rating offered. This possibility, known as rating shopping, is relatively limited on the US corporate bond market because the two main rating agencies (S&P and Moody's) rate virtually all large bond issuers. In this study, we use the data on corporate bond ratings assigned by two Israeli rating agencies affiliated with S&P and Moody's during the period 2004–2012. We show that while one agency (Midroog) systematically assigned higher ratings, the ratings of the other agency (S&P-Maalot) were inflated due to rating shopping. However, despite the many features that encourage rating inflation, the resulting distortion was relatively small (one notch). This may be a fair price for maintaining a competitive rating industry.     

Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings

Abstract:   In recent years credit rating agencies have started rating firms who have not asked for a rating. Recipients of unsolicited ratings argue that the assigned ratings are too low and reflect a lack of comprehensive knowledge of the rated firms. We set out to examine these claims using a comprehensive and international sample of 1,060 bank ratings. Our results show that there is a significant difference in the distributions of ratings, and the shadow group has lower ratings. The results also indicate that banks that received shadow ratings are smaller and have weaker financial profiles than banks that have other ratings. This explains, in part, the lower ratings. In addition, we develop a model to explain bank ratings. The two‐step treatment effects model shows that bank size, profitability, asset quality, liquidity, and sovereign credit risk are important factors in determining bank ratings.     

Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?

We rely on the ESG ratings assigned by four distinct agencies (MSCI, Refinitiv, Robeco, and Sustainalytics) to study the link between ESG scores and firms’ cost of debt financing during the Covid-19 pandemic. We document the existence of a statistically and economically significant ESG premium, i.e. better rated companies access debt at a lower cost. Despite some differences across rating agencies, this result is robust to additional controls for the issuer’s credit standing as well as several bond and issuer’s characteristics. We find that this effect is mainly driven by firms domiciled in advanced economies, whereas creditworthiness considerations prevail for firms in emerging markets. Lastly, we show that the lower cost of capital for highly rated ESG firms is explained both by investors’ preference for more sustainable assets and by risk-based considerations unrelated to firms’ creditworthiness, such as exposure to climate change risks.     

Relevance of U.S.-GAAP for Japanese companies

We use differences in U.S.-GAAP and Japanese-GAAP accounting measures to evaluate the value-relevance of U.S.-GAAP reports. We show data provided in U.S.-GAAP financial statements of Japanese firms is value-relevant beyond that contained in domestic-GAAP statements. Our results complement extant research and support the proposition that U.S. reporting methods provide value-relevant data. Understanding the value-relevance of data from Japanese firms is important in its own right because of the major role these firms play in intenational markets. We also provide evidence on significant transnational firms that voluntarily provide U.S.-GAAP statements.     

Initial credit ratings and earnings management

Credit rating agencies assert that they rely on financial information provided by issuers and that they value rating stability as well as accuracy. In an environment where rating agencies depend on issuer-reported information and are reluctant to adjust ratings promptly, managers of issuing firms can utilize the discretion afforded by GAAP to obtain the most favorable credit ratings. Consistent with our expectations, we find that current accruals are unusually positive and high around initial credit ratings. The increase in abnormally high accruals leading up to the initial credit rating year is followed by a reversal in the subsequent years. Multivariate regression analyses suggest that accounting accruals, abnormal current accruals in particular, are significantly positively related to initial credit ratings after controlling for several issue- and issuer-related characteristics indicative of default risk. Our results are robust to additional tests that account for endogeneity between credit ratings and earnings management, adjust for performance, and account for firms issuing debt and equity simultaneously.     

Financial distress,information asymmetry,and syndicate structure: Evidence from Japanese borrowers

This paper examines how borrower firm characteristics affect syndicate size structure in the Japanese loan market for the 1999–2003 period when the banking system is undergoing a major consolidation. We find that syndicates are smaller when borrowers have higher credit risk and when borrowers present larger information asymmetries to the lending group. Interestingly, however, these results are primarily driven by keiretsu (business group) firms. This suggests that the benefits of enhanced monitoring and superior renegotiation prospects are especially useful for banks participating in syndicated loans to Keiretsu firms in Japan rather than informationally opaque, independent firms.     

Credit ratings and IPO pricing

We examine the effects of credit ratings on IPO pricing. The evidence from U.S. common share IPOs during 1986–2004 shows that when firms go public, those with credit ratings are underpriced significantly less than firms without credit ratings. Credit rating levels, however, do not have a significant effect on IPO underpricing. The existence of credit rating reduces uncertainty about firm value. It is the value certainty that matters, not the value per se. Credit ratings also reduce the degree of price revision during the bookbuilding process and the aftermarket volatility in the post-IPO period. The evidence suggests that credit ratings convey useful information in reducing value uncertainty of the issuing firms as well as information asymmetry in the IPO markets.     

Is There a Difference Between Solicited and Unsolicited Bank Ratings and, If So, Why?

This paper analyses the effect of soliciting a rating on the actual outcome of bank ratings. Using two sample banks (one rated by Fitch and one rated by S&P), I find evidence that unsolicited ratings tend to be lower than solicited ones, after accounting for differences in observable bank characteristics. This downward bias does not seem to be explained by the fact that better-quality banks self-select into the solicited group. Rather, unsolicited ratings appear to be lower because they are based on public information and are therefore dependent on the quantity of public information disclosed by the banks. As a result, unsolicited ratings tend to be more conservative than solicited ratings, which incorporate both public and non-public information. While the latter result is also consistent with the fact that credit rating agencies may blackmail low-disclosure firms, the findings suggest that blackmailing—if it is actually used—is ineffective in making these firms start to pay for a rating.