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.     

Earnings Predictability,Bond Ratings,and Bond Yields

We examine the role that earnings predictability plays in establishing a firm’s cost of debt capital by measuring its influence on establishing a new issue’s bond rating. In addition, we also examine the effects of earnings predictability on the initial pricing of the firm’s debt. Using new corporate bond issues from the period 1990–2000, our results indicate that the degree of predictability of a firm’s earnings is positively associated with a firm’s bond rating. Moreover, earnings predictability is also documented to be negatively associated with the offering yield. Importantly, bond rating classification accuracy is improved when specific measures of a firm’s earnings predictability are added to a robust model.JEL Classification:     

Existence of Unsolicited Ratings

Rating agencies provide unsolicited ratings voluntarily without the borrowers’ consent. Therefore, the agencies do not get paid for this service. While, supporters of unsolicited ratings argue that voluntary disclosure is done to build reputation, those opposing this practice argue that this leads to financial blackmail. In this paper, we build a model that addresses these issues. We identify the scenarios where rating agencies will provide unsolicited ratings. Finally, we find the welfare effect of unsolicited ratings and suggest policy implications.      

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。     

Bond Yields, Ratings, and Financial Information: Evidence from Public Utility Issues

This study investigates the relative roles of bond ratings and financial information in the setting of bond yields. Structural equation modeling techniques are used to learn whether ratings determine yields or whether both ratings and yields are determined by a concurrent set of economic and financial factors. Tests of alternative structural model configurations provide evidence regarding the associations between bond ratings, financial information, and bond yields. Both ratings and financial information are found to play an important role in determining bond yields. In addition, yields are consistent with the higher rating in cases of split ratings.     

债券评级分析师任期、债项评级和信用利差

基于2008-2019年长期信用债数据,本文实证研究发现:评级分析师任期越长,信用评级越低;较长的分析师任期能够影响评级准确性,降低"未能预测违约"的第Ⅰ类错误,增加"错误违约预警"的第Ⅱ类错误;相比于短分析师任期,长分析师任期能够增强信用评级对信用利差的降低作用.本文还发现,相比于未被投资者付费评级机构评级的债券,投...     

Testing for Opaqueness in the European Banking Industry: Evidence from Bond Credit Ratings

The question of whether banks are relatively more opaque than non-banking firms is empirically investigated by analyzing the disagreement between rating agencies (split ratings) on 2,473 bonds issued by European firms during the 1993–2003 period. Four main results emerge from the empirical analysis. First, fewer bank issues have split ratings overall, but the predicted probability of a split rating is higher for banks after controlling for risk and other issue characteristics. Second, subordinated bonds are subject to more disagreement between rating agencies. Third, bank opaqueness increases with financial assets and decreases with bank fixed assets. Fourth, bank opaqueness increases with bank size and capital ratio. The implications of these findings for regulatory policy are also discussed. All errors remain those of the author. This paper was prepared while the author was visiting the Department of Finance, Insurance and Real Estate at the Graduate School of Business Administration, University of Florida.     

Tiebreaker: Certification and Multiple Credit Ratings

This paper explores the economic role credit rating agencies play in the corporate bond market. We consider three existing theories about multiple ratings: information production, rating shopping, and regulatory certification. Using differences in rating composition, default prediction, and credit spread changes, our evidence only supports regulatory certification. Marginal, additional credit ratings are more likely to occur because of, and seem to matter primarily for, regulatory purposes. They do not seem to provide significant additional information related to credit quality.     

Director Networks and Credit Ratings

We explore the effect of director social capital, directors with large and influential networks, on credit ratings. Using a sample of 11,172 firm‐year observations from 1999 to 2011, we find that larger board networks are associated with higher credit ratings than both firm financial data and probabilities of default predict. Near‐investment grade firms improve their forward‐looking ratings when their board is more connected. Last, we find that larger director networks are more beneficial during recessions, and times of increased financial uncertainty. Our results are robust to controls for endogeneity. Tests confirm that causality runs from connected boards to credit ratings.     

Credit Ratings and Capital Structure

This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs (benefits) associated with firm credit rating level differences and tests whether concerns for these costs (benefits) directly affect debt and equity financing decisions. Firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating. This behavior is consistent with discrete costs (benefits) of rating changes but is not explained by traditional capital structure theories. The results persist within previous empirical tests of the pecking order and tradeoff capital structure theories.     

Credit Ratings and Stock Liquidity

We analyze contemporaneous and predictive relations betweencredit ratings and measures of equity market liquidity and findthat common measures of adverse selection, which reflect a portionof the uncertainty about future firm value, are larger whencredit ratings are poorer. We also show that future rating changescan be predicted using current levels of adverse selection.Collectively, our results validate widely used microstructuremeasures of adverse selection and offer new insights into thevalue of credit ratings and the specific nature of the informationthey contain.     

The Credit Ratings Game

The collapse of AAA‐rated structured finance products in 2007 to 2008 has brought renewed attention to conflicts of interest in credit rating agencies (CRAs). We model competition among CRAs with three sources of conflicts: (1) CRAs conflict of understating risk to attract business, (2) issuers' ability to purchase only the most favorable ratings, and (3) the trusting nature of some investor clienteles. These conflicts create two distortions. First, competition can reduce efficiency, as it facilitates ratings shopping. Second, ratings are more likely to be inflated during booms and when investors are more trusting. We also discuss efficiency‐enhancing regulatory interventions.     

Asset Opaqueness and Split Bond Ratings

We examine the relation between asset opaqueness and split ratings. We find that firms with asset opaqueness problems are more likely to receive split bond ratings from Moody s and S&P rating agencies. Our results suggest that there is a causal link between asset opaqueness and split ratings.     

Deferred Taxes and Bond Ratings: A Canadian Case

This paper explores the usefulness of the current Canadian Institute of Chartered Accountants standard on accounting for income taxes in bond rating decisions by credit analysts. Bond rating prediction models using accounting variables generated with alternate treatment of income taxes, have been developed. The analysis indicates that additional information presented by the above standard has not contributed significantly to the bond raters' decision making process.     

Equity Volatility and Corporate Bond Yields

This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm‐level volatility can explain as much cross‐sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields.     

Credit Ratings and Managerial Voluntary Disclosures

This study investigates whether managers influence credit ratings via voluntary disclosures. I find that firms near a rating change have a higher incidence of a disclosure regarding product and business expansion (PBE) plans. This finding is more evident for firms that are subject to lower proprietary costs of disclosures, which implies that managers do trade off both the benefits and costs of the disclosures. I find no evidence that firms close to a rating change selectively release good news or suppress bad news on PBE. Overall, my results suggest that firms generally exhibit a credible commitment to maintaining disclosure transparency for a desired credit rating.     

Institutional Environment and Sovereign Credit Ratings

We use a sample of 86 counties to examine the cross-sectional determinants of sovereign credit ratings. We find that the quality of a country's legal and political institutions plays a vital role in determining these ratings. A one-standard-deviation increase in our legal environment index results in an average credit rating increase of 0.466 standard deviations, even when we control for obvious factors such as GDP per capita, inflation, foreign debt per GDP, previous defaults, and general development. Although part of this effect is due to the legal environment's endogeneity, its relative importance is robust to endogeneity concerns.     

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.