THE INFORMATIONAL ROLE OF BANK LOAN RATINGS

We analyze the relatively new phenomenon of credit ratings on syndicated loans, asking first whether they convey information to the capital markets. Our event studies show that initial loan ratings and upgrades are not informative, but downgrades are. The market anticipates downgrades to some extent, however. We also examine whether public information reflecting borrower default characteristics explains cross‐sectional variation in loan ratings and find that ratings are only partially predictable. Our evidence suggests that loan and bond ratings are not determined by the same model. Finally, we estimate a credit spread model incorporating bank loan ratings and other factors reflecting default risk, information asymmetry, and agency problems. We find that ratings are related to loan rates, given the effect of other influences on yields, suggesting that ratings provide information not reflected in financial information. Ratings may capture idiosyncratic information about recovery rates, as each of the agencies claims, or information about default prospects not available to the market.     

THE INFORMATIONAL CONTENT OF BOND RATINGS

This paper explores the risk structure of interest rates. The focus is on whether yields on industrial bonds indicate that market participants base their evaluations of a bond issue's default risk on agency ratings or on publicly available financial statistics. Using a non-linear least squares procedure, the yield-to-maturity is related to Moody's rating, Standard and Poor's (S&P) rating, and accounting measures of creditworthiness such as coverage and leverage. Market yields are found to be significantly correlated with both the ratings and a set of readily available financial accounting statistics. These results indicate (1) that market participants base their evaluations of an issue's creditworthiness on more than the agencies' ratings and (2) that the ratings bring some information to the market above and beyond that contained in the set of accounting variables. The paper also asks whether the market views Moody's and Standard and Poor's ratings as equally reliable measures of risk or whether the market attaches more weight to one agency's ratings than the other. Finally, the hypothesis that the market pays more attention to the accounting measures and less to the ratings if the rating has not been reviewed recently is tested.     

信用评级变动能反映企业真实财务信息吗?——基于财务重述的视角

本文以2007-2018年拥有主体信用评级的A股上市公司为研究对象,利用企业财务错报在未来被重述这一场景,检验主体信用评级变动能否反映企业真实财务信息。研究发现,评级机构在发债企业财务错报年显著下调了主体信用评级,而在重述公告发布年没有上述现象,这表明主体信用评级下调反映了企业的真实财务信息。在控制内生性影响后,结论仍然成立。进一步研究发现,发债企业当期财务错报涉及盈余时,主体信用评级被下调的幅度更大,说明评级机构更加关注与盈余相关的财务信息。机制分析表明,评级机构维护自身声誉是主体信用评级变动能够反映企业真实财务信息的主要机制。此外,主体信用评级被下调还导致了资本市场投资者的负面反应。本文的研究结果为主体信用评级变动反映企业真实财务信息提供了直接的证据支持,揭示了主体信用评级的信息含量,也对理解中国情境下评级机构调整主体信用评级的行为动机提供参考。     

THE IMPACT OF SPLIT BOND RATINGS ON RISK PREMIA

Interest rates for bonds are negatively correlated with credit ratings assigned by agencies such as Moody's Investor Service and Standard & Poor's. Still in dispute is whether or not the ratings themselves convey information that is reflected in prices, hence interest rates in the bond markets. Disagreement between these two agencies' ratings leads to “split” ratings, and in this paper, the authors use the phenomenon of split ratings to assess whether or not ratings have a separate impact on bond prices. The results indicate that a downside split appears to have greater bond yield impact than an upside split. The findings are inconsistent with bond market efficiency, at least in the strong form. The market considers the quality of a split-rated bond to reflect the lower of the two ratings. Finally, the symmetry of the results with respect to the ratings agencies indicates that neither agency has more influence than the other in determining bond yields.     

The impact of sovereign credit ratings on Eurobond yields: Evidence from Africa

The importance of sovereign credit ratings and Eurobonds issued by governments have come to the fore in Africa in the last decade. We examine whether changes in sovereign credit ratings impact Eurobond yields in 8 countries over the period of 2014–2019. Our approach reviews rating changes impact on Eurobond yields utilising the event study methodology. Our findings reflect that, on average, close to a third of rating actions directly impact bond yields in African countries. The statistically significant events include the downgrades of South Africa and Namibia to non-investment grade in 2017 reflecting critical transitions and bond investors’ reactions. Overall, the low percentage of a third, relative to previous international studies, suggests that largely rating changes are anticipated, do not have much new information and perhaps the perceived power of credit rating agencies may be overstated. In our view, the results reflect that pre-announcements of rating review dates since 2014 makes rating actions predictable and less impactful to bond yields. In addition, they reflect that bond investors adjust in real time as new information come in, resulting in less reliance on the opinions of CRAs and using their own assessments.     

The Independent Impact of Credit Rating Changes – The Case of Moody's Rating Refinement on Yield Premiums

On April 26, 1982, Moody's Investors Service refined its rating system for the first time in its seventy-three year rating history. We examine the information content of the rating refinement in the study. We find a statistically significant change in the yields on bonds whose ratings were downgraded. The detection of the impact of refinement on bond prices implies that rating agencies perform an important function in financial markets, that is they provide information to investors.     

Longitudinal accounting comparability and bond credit spreads: Evidence from China

This paper proposes a procedure to measure firms’ longitudinal accounting comparability and investigates whether it affects bond risk premiums. The results provide robust evidence that bonds of firms with more longitudinally comparable accounting information have lower credit spreads. This effect is stronger when the firms’ financial performance is poor and for bonds with speculative credit ratings. Results also reveal that firms with less longitudinally comparable accounting information are more informationally asymmetric and do have a higher expected default probability. Finally, the effects of the longitudinal and the cross-sectional comparability in reducing bond credit spreads are incremental to each other.     

SPLIT RATINGS,BOND YIELDS,AND UNDERWRITER SPREADS

A split bond rating occurs when Moody's and Standard & Poor give different ratings to the same issue. We examine 1,277 public industrial bond issues, where 221 have split ratings, issued from 1980 through mid-1993. For split-rated industrial bonds, neither rating agency consistently gives higher ratings. Earlier studies find yields for split-rated bonds to be priced as either the higher or the lower of the ratings. We find the yields on split-rated bonds to be an average of the yields on the two ratings. Split ratings for industrial bonds appear to reflect random differences on the part of rating agencies. Our results differ from previous studies because we use a substantially larger sample and include high-yield bonds. As long as a bond has an investment-grade rating, the underwriter fees are found to be essentially the same for all rating categories. Below investment grade, the rating substantially affects the underwriter fee. Thus, split ratings for high-yield bonds have an important effect on the underwriter spread.     

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 impact of narrative disclosure readability on bond ratings and the cost of debt

Prior research on the determinants of credit ratings has focused on rating agencies’ use of quantitative accounting information, but the there is scant evidence on the impact of textual attributes. This study examines the impact of financial disclosure narrative on bond market outcomes. We find that less readable financial disclosures are associated with less favorable ratings, greater bond rating agency disagreement, and a higher cost of debt. We improve causal identification by exploiting the 1998 Plain English Mandate, which required a subset of firms to exogenously improve the readability of their filings. Using a difference-in-differences design, we find that the firms required to improve the readability of their filings experience more favorable ratings, lower bond rating disagreement, and lower cost of debt. Collectively, our evidence suggests that textual financial disclosure attributes appear to not only influence bond market intermediaries’ opinions but also firms’ cost of debt.     

INFORMATION OPACITY AND FITCH BOND RATINGS

We examine the marginal impact of Fitch ratings on the at‐issuance yields of industrial and utility bonds rated by Moody's and Standard & Poor's. We find that Fitch ratings reduce the yield premiums on information‐opaque bonds by about 30%, or 15 basis points. The finding is robust even when a Fitch rating exactly equals the two major ratings or their average. The findings suggest that Fitch ratings are not redundant but bring additional information to investors. Increased competition in the rating industry enhances the information efficiency of the bond market, and the existence of smaller rating agencies is economically justified.     

PREDICTING INDUSTRIAL BOND RATINGS WITH A PROBIT MODEL AND FUNDS FLOW COMPONENTS

Since 1978, there has been a significant change in new bond offerings with a substantive increase in the number of nonconvertible high risk bonds. This study uses an n-chotomous multivariate probit model with cash-based funds flow components and financial ratios to predict industrial bond ratings. The n-chotomous probit model provides superior information for evaluating the bond classification process. The model determines the probabilities of a bond being rated in one of three risk classes. The distribution of the probabilities for each predicted bond rating provides a wealth of new information for evaluating the accuracy of the actual rating. New and reclassified bond ratings by Moody's in 1983 provide the information base for the model that is used to predict 1984 ratings. Initially the classification and predictive results were slightly lower than previous studies. A careful analysis of the probability distributions showed that results were close to being correct in over 90 percent of the cases. The analysis found five cash flow components to be significant in predicting the bond ratings of reclassified issues. The significant components were inventories, other current liabilities, dividends, long-term financing, and fixed coverage charges. The likelihood tests indicated that both ratios and funds flow components contributed information that significantly improved the ability of the n-chotomous multivariate probit model to classify new and revised bond ratings. The study provides valuable insight and nuances concerning the bond-rating process.     

Control/ownership structure,creditor rights protection,and the cost of debt financing: International evidence

We explore the effect of governance on bond yield-spreads and ratings in a multinational sample of firms. We find strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) and family control have a positive and significant effect on bond yield-spreads, and a negative and significant effect on bond ratings. Control in the hands of widely held financial firms has a positive effect on bond ratings only, while State control has no effect on either bond yield-spreads or ratings. We also find that a higher protection of debtholders’ rights generally reduces bond yield-spreads and increases bond ratings. Our results additionally show that, for both bondholders and rating agencies, the enforcement of debt laws is crucially important. Finally, we document a negative effect of debt covenants on debt costs when there is a high expropriation risk and poor creditor rights protection.     

环境信息透明度与企业信用评级——基于债券评级市场的经验证据

基于2008至2015年期间公司债券发行主体的信用评级数据和手工收集的上市公司环境信息数据,本文研究了环境信息透明度对企业信用评级的影响。研究结果显示,公司获得高信用评级的概率与其环境信息透明度显著正相关;环境信息传递出公司的特质风险、盈余持续性以及盈余质量等信息,从而影响评级决策。进一步研究发现,环境信息透明度与企业信用评级之间的正相关关系在内部控制质量高、具有高质量外部审计的公司中更显著。采用工具变量两阶段回归方法、公司固定效应模型以及倾向得分配对方法控制内生性后,上述结论依然成立。此外,本文发现环境信息透明度可通过影响企业信用评级降低公司的债券融资成本,环境信息透明度对企业信用评级和债券融资成本的影响在污染行业中显著更强。上述研究发现有助于拓展环境信息披露对市场中介行为影响的相关研究,对认识非财务信息在资本市场中的作用和推进节能减排提供了重要参考。     

Banking on the principles: Compliance with Basel Core Principles and bank soundness

This study finds that banks receive more favorable Moody's financial strength ratings in countries with better compliance with Basel Core Principles related to information provision. The results are robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, and reverse causality. Compliance with other Core Principles does not affect ratings robustly. Measuring bank soundness through Z-scores yields broadly similar results for advanced and emerging markets. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the core principles.     

Unsolicited Versus Solicited: Credit Ratings and Bond Yields

This paper is the first attempt to analyze Standard & Poor’s unsolicited and solicited ratings by using bond-yield data in Japan. Our findings show that there are differences in firm characteristics between firms seeking solicited ratings and those that receive unsolicited ratings. Firms with solicited ratings have less information asymmetry and are more likely to be owned by foreign investors, generate more revenue from exports, be cross-listed in the US, and have higher firm quality. But, firms with unsolicited ratings pay higher costs for debt, and their bond prices react more strongly to credit-rating changes. Yield spreads for new bonds with unsolicited ratings are higher than those with solicited ratings, because unsolicited ratings have higher information asymmetry, and investors therefore demand higher yields. We find that bond-price reactions to the announcements of unsolicited rating downgrades (upgrades) are negative (positive) and significant, while bond prices do not react significantly to solicited rating downgrades or upgrades.     

Split Bond Ratings and Information Opacity Premiums

This paper examines the relationship between split bond ratings and bond yields at the notch level for newly issued corporate bonds. We find that split rated bonds average a 7-basis-point yield premium over nonsplit rated bonds of similar credit risk. The yield premium increases from 5 basis points for one-notch splits to 15 (20) basis points for two-notch (three-notch) splits. These findings indicate that investors demand higher yields for split rated bonds to compensate for the information opacity of such bonds. In addition, the yield premium for split rated bonds is higher during economic recessions, indicating investors are more risk averse during economic downturns. Consequently, split ratings impose higher borrowing costs for firms, especially during economic downturns.     

Proportionate consolidation versus the equity method: Additional evidence on the association with bond ratings

From a financial analysis perspective, proportionate consolidation of significant influence equity investments is often presumed to provide more useful information than equity method accounting. Surprisingly, Kothavala [Kothavala, K., 2003, Proportional consolidation versus the equity method: A risk measurement perspective on reporting interests in joint ventures, Journal of Accounting and Public Policy 22, 517-538.] finds that financial statement measures based on the equity method are more relevant for bond ratings than are similar measures based on proportionate consolidation. This study provides additional evidence regarding this issue. Using a sample of manufacturing firms with significant influence equity investments accounted for under U.S. GAAP, the results indicate that pro forma proportionately consolidated financial statements have greater relevance than equity method statements for explaining bond ratings.     

What Is in a Municipal Bond Rating?

Studies on the determinants of municipal bond ratings contain two conspicuous patterns: the use of financial accounting variables and the application of discriminant analysis to them. Over 70 different financial accounting variables have been specified, leading to different findings across the studies. In addition, discriminant analysis has been applied in these studies without correcting for violations of its underlying assumptions. Akaike's information criterion and Lachenbruch's U method are used to show how a probit model specified with economic base diversification, economic expansion, and fiscal management variables may be an improvement over the application of discriminant analysis to financial accounting variables in the determination of a triple A bond rating.     

The effect of CEO power on bond ratings and yields

We argue that executives can affect firm outcomes only if they have influence over crucial decisions. This study explores the impact of CEO power or CEO dominance on bond ratings and yield spreads. We find that credit ratings are lower and yield spreads higher for firms whose CEOs have more decision-making power. To further investigate why bondholders are concerned about CEO power, we show that powerful CEOs tend to maintain an opaque information environment. Bondholders demand higher yields because it is difficult for them to monitor managers in firms with powerful CEOs. Taken together, the results suggest that bondholders perceive CEO power as a critical determinant of the cost of bond financing.