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 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 INFORMATIONAL CONTENT OF FORWARD RATES: FURTHER EVIDENCE

Using single-equation estimation techniques, researchers have generally found that forward rates have little ability to predict future spot rates. In this paper, Generalized Least Squares is used to estimate simultaneously the forecastive ability of multiple forward rates. It is discovered that current forward rates significantly predict future spot rates for various rate maturities up to twelve months ahead. Also found are instances in which the Treasury bill market does not conform to the weak form of market efficiency.     

THE REGULATION EFFECT OF CREDIT RATINGS ON BOND INTEREST YIELD: THE CASE OF JUNK BONDS

This paper examines the 'regulation effect' of bond ratings of yield. It is shown that the high yield premia on 'speculative bonds' not only reflect the high probability of default, but also contain an effect of regulation. A multiple discriminant analysis (MDA) technique is used to separate the default component of yield premium from the regulation effect. The results in the study suggest that non-regulated investors, by taking advantage of the regulation effect, may earn an extra premium on a diversified portfolio of 'speculative bonds', at least for the period under this study (from January 1982-June 1987).     

MULTIVARIATE ANALYSIS OF CORPORATE BOND RATINGS AND INDUSTRY CLASSIFICATIONS

Previous statistical models designed to predict bond ratings use a variety of financial data and ratios; however, the possible effect of the industry in which the firms operate is generally disregarded. Although the exact bond rating process used by the rating agencies is not known, industry analysis is an important component of the process. This study evaluates the use of industry-specific multiple discriminant functions for predicting bond ratings. The results support using such a technique.     

TIMELINESS OF ACCOUNTING REPORTS AND THEIR INFORMATIONAL CONTENT ON THE CAPITAL MARKET

Timeliness is recognized as an important characteristic of accounting information by the accounting profession, the users of accounting information, and the regulatory agencies. According to the evidence presented in this paper, accounting reports with shorter delay have a higher informational content than those with longer delay. At the time of release to the capital market, the effect of delay on the information content seems to be more significant in the case of the interim rather than the annual reports. This may be explained by the major characteristics which differentiate the information contained in the interim reports from that contained in the annual reports, the differences in their role in the investor's decision process, and the existence of substitute information.     

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.