The Regulatory Role of Credit Ratings and Voluntary Disclosure

2021 ◽  
Author(s):  
Riddha Basu ◽  
James P. Naughton ◽  
Clare Wang
Keyword(s):  
Voluntary Disclosure ◽  
Credit Rating ◽  
Credit Ratings ◽  
Regulatory Role ◽  
Rating Agencies ◽  
Corporate Credit ◽  
Quasi Experimental ◽  
Rating Changes ◽  
Corporate Credit Rating

We find that corporate credit rating changes have an effect on firms' voluntary disclosure behavior that is independent of the information they convey about firm fundamentals. Our analyses exploit two separate quasi-experimental settings that generate either exogenous credit rating downgrades or credit rating upgrades (i.e., credit rating label changes). We find evidence of a negative relation between the direction of the credit rating label change and the provision of voluntary disclosure in both settings-firms respond to exogenous downgrades by increasing voluntary disclosure and to exogenous upgrades by decreasing voluntary disclosure. The effects we document are attributable to the regulatory role rather than the information role of credit ratings. Overall, our analyses indicate that credit rating agencies as gatekeepers influence firms' provision of voluntary disclosure.

The Regulatory Role of Credit Ratings and Voluntary Disclosure

2020 ◽  
Author(s):  
Riddha Basu ◽  
James P. Naughton ◽  
Clare Wang
Keyword(s):  
Voluntary Disclosure ◽  
Credit Ratings ◽  
Regulatory Role

Market Segmentation Effects in Corporate Credit Rating Changes: The Case of Emerging Markets

2008 ◽  
Vol 35 (2) ◽  
pp. 141-166 ◽  
Author(s):  
Seung Hun Han ◽  
Yoon S. Shin ◽  
Walter Reinhart ◽  
William T. Moore
Keyword(s):  
Emerging Markets ◽  
Market Segmentation ◽  
Credit Rating ◽  
Corporate Credit ◽  
Rating Changes ◽  
Corporate Credit Rating

The Financial Crisis and Corporate Credit Ratings

2017 ◽  
Vol 92 (4) ◽  
pp. 161-189 ◽  
Author(s):  
Ed deHaan
Keyword(s):  
Financial Crisis ◽  
Default Risk ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Theoretical Models ◽  
Financial Instruments ◽  
Rating Agencies ◽  
Corporate Credit ◽  
The Global Financial Crisis

ABSTRACT Credit ratings on many financial instruments failed to accurately portray default risk before the global financial crisis. I find no decline in the performance of corporate credit ratings during or after the crisis, indicating that the failures of ratings on financial instruments were due to conditions unique to the rating agencies' financial instruments divisions. Rather, the preponderance of tests indicate that corporate credit rating performance improves after the crisis, consistent with the rating agencies positively responding to public criticism and regulatory pressures. At the same time, I find evidence of sophisticated market participants decreasing their reliance on corporate credit ratings after the crisis. Consistent with theoretical models of reputation cyclicality, a likely explanation is that the rating agencies suffer spillover reputation damage from their failed ratings on financial instruments. My study informs regulators, practitioners, and academics about the performance of corporate credit ratings during and after the crisis, and provides novel empirical evidence consistent with reputation concerns affecting credit rating usage decisions.

The relevance of credit ratings over the business cycle

2016 ◽  
Vol 17 (2) ◽  
pp. 152-168
Author(s):  
Christian Fieberg ◽  
Richard Lennart Mertens ◽  
Thorsten Poddig
Keyword(s):  
Business Cycle ◽  
Agency Costs ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Cross Sectional ◽  
Content Type ◽  
Rating Agencies ◽  
The Business Cycle ◽  
Rating Changes

Purpose Credit market models and the microstructure theory of the ratings market suggest that information provided by credit rating agencies becomes more relevant in recessions when agency costs are high and less relevant in expansions when agency costs are low. The purpose of this paper is to empirically test these hypotheses with regard to equity markets. Design/methodology/approach The authors use business cycle identification algorithms to map rating events (credit rating changes and watchlist inclusions) to business cycle phases and apply the event study methodology. The results are backed by cross-sectional regressions using a variety of control variables. Findings The authors find that the relevance of information provided by credit rating agencies for equity prices heavily depends on the level of agency costs. Furthermore, the authors detect a “flight-to-quality” during recessions in the speculative grade segment and a weakened relevance of rating events in expansions in the investment grade segment. Originality/value This paper is the first to empirically analyse how equity investors perceive credit rating changes and watchlist inclusions over the business cycle. In the empirical analysis, the authors use a large sample of about 25,000 rating events in all Organisation for Economic Co-operation and Development markets. The presented results underline that credit ratings address the agency problem in financial markets and can thus be regarded as useful for risk management or regulation.

scholarly journals A motivation for banks in emerging economies to adapt agency ratings when assessing corporate credit

2019 ◽  
Vol 22 (1) ◽  
Author(s):  
Tanja Verster ◽  
Riaan De Jongh ◽  
Simon Greenberg ◽  
Erika Fourie ◽  
Dries De Wet
Keyword(s):  
South African ◽  
Credit Rating ◽  
Credit Ratings ◽  
Relevant Literature ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Corporate Credit ◽  
Standard And Poor's ◽  
International Credit ◽  
High Level

Background: This article considers whether South African banks should utilise the credit ratings provided by US-based credit rating agencies when assessing the creditworthiness of corporate borrowers.Aim: A review is conducted of the relevant literature and specifically the methodologies used by the credit rating agencies for ranking corporates in emerging markets.Setting: The three largest international credit rating agencies are Fitch Ratings, Moody’s Investor Services, and Standard and Poor’s. These agencies’ credit ratings cover the global spectrum of corporate, sovereign, financial and other public entities and the securities and obligations they issue. The analytical frameworks used to produce these ratings are referred to as credit rating methodologies.Method: A review of Moody’s ratings for South African corporate entities was undertaken to examine claims of a sovereign ceiling influencing the external ratings obtained by these institutions in emerging markets.Results: Only 14 of the 200 global South African ratings pierced the sovereign ceiling.Conclusion: The study concludes that the use of unmodified external ratings by banks to assess a corporate borrower should be discouraged. High-level suggestions are provided on how the methodologies and data used by the external agencies may rather be used to arrive at more suitable internal ratings.

scholarly journals The Effect of Reputation Shocks to Rating Agencies on Corporate Disclosures

2018 ◽  
Vol 94 (1) ◽  
pp. 299-326 ◽  
Author(s):  
Mani Sethuraman
Keyword(s):  
Credit Risk ◽  
Voluntary Disclosure ◽  
Credit Rating ◽  
Credit Ratings ◽  
Earnings Forecasts ◽  
Corporate Bond ◽  
Management Earnings Forecasts ◽  
Rating Agencies ◽  
Theoretical Predictions ◽  
Bond Issuers

ABSTRACT This paper explores the effect of a credit rating agency's (CRA) reputation on the voluntary disclosures of corporate bond issuers. Academics, practitioners, and regulators disagree on the informational role played by major CRAs and the usefulness of credit ratings in influencing investors' perception of the credit risk of bond issuers. Using management earnings forecasts as a measure of voluntary disclosure, I find that investors demand more (less) disclosure from corporate bond issuers when the ratings become less (more) credible. In addition, using content analytics, I find that bond issuers disclose more qualitative information during periods of low CRA reputation to aid investors in assessing credit risk. My findings are consistent with credit ratings providing incremental information to investors and reducing adverse selection in lending markets. Further, consistent with theoretical predictions, my findings suggest that managers rely on voluntary disclosure as a credible mechanism to reduce information asymmetry in bond markets.

scholarly journals Impact of Sovereign Credit Ratings on Capital Markets

2017 ◽  
Author(s):  
Mustafa Batuhan Tufaner ◽  
Sıtkı Sönmezer ◽  
Ahmet Alkan Çelik
Keyword(s):  
Exchange Rate ◽  
Financial Markets ◽  
Stock Price ◽  
Credit Rating ◽  
Credit Ratings ◽  
Rating Agencies ◽  
Political Situation ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings ◽  
Rating Changes

Sovereign credit ratings are of great importance in terms of country's economy in recent years. Sovereign credit ratings can greatly affect both financial markets and macroeconomic balances. On the other hand, these credit ratings are closely related to the political situation of the countries. Therefore, all factors behind the credit rating announcements operating in global markets needs to be put forward. The content of this paper is to identify policy interest reaction towards sovereign credit ratings and examine of countries that experienced severe rating changes. In this bulletin, big three credit rating agencies are compared and critically assessed various credit rating of Turkey. The analyzed dataset covers sovereign rating announcements released by reputable rating agencies, stock price, Dollar / TL exchange rate, Dollar / Euro exchange rate and benchmark bond.

scholarly journals ESG as a Measure of Credit Ratings

Risks ◽  
2021 ◽  
Vol 9 (12) ◽  
pp. 226
Author(s):  
Patrycja Chodnicka-Jaworska
Keyword(s):  
Financial Institutions ◽  
Credit Rating ◽  
Negative Impact ◽  
Credit Ratings ◽  
Stock Exchanges ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Thomson Reuters ◽  
Rating Changes ◽  
The Impact

The aim of this study was to examine the impact of environmental, social, and governance (ESG) measures on credit ratings given to non-financial institutions by the largest credit rating agencies according to economic sector divisions. The hypotheses were as follows: a strong negative impact on non-financial institutions’ credit rating changes will result from ESG risk changes, and the reaction of credit rating changes will vary in different sectors. Panel event models were used to verify these hypotheses. The study used data from the Thomson Reuters Database for the period 2010–2020. The analysis was based on the literature on credit rating determinants and on papers and reports on COVID-19, ESG factors, and their impact on credit rating changes. Linear decomposition was used for the analysis. To verify these hypotheses, long-term issuer credit ratings presented by Moody’s and Fitch for European companies listed on these stock exchanges have been used. In the analyses, financial and non-financial factors were also considered. The results suggested that, within the last year, the methodology presented by credit rating agencies has changed, and ESG factors are one of the basic measures that are used to verify credit rating changes, especially those related to the pandemic.

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