Why they keep missing: An empirical investigation of rational inattention of rating agencies

Makram El-Shagi and Gregor von Schweinitz

No 1/2017, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: Sovereign ratings have frequently failed to predict crises. However, the literature has focused on explaining rating levels rather than the timing of rating announcements. We fill this gap by explicitly differentiating between a decision to assess a country and the actual rating decision. Thereby, we account for rational inattention of rating agencies that exists due to costs of reassessment. Exploiting information of rating announcements, we show that (i) the proposed differentiation significantly improves estimation; (ii) rating agencies consider many nonfundamental factors in their reassessment decision; (iii) markets only react to ratings providing new information; (iv) developed countries get preferential treatment.

Keywords: rating agencies; sovereign risk; rational inattention (search for similar items in EconPapers)
JEL-codes: C25 F34 G24 (search for similar items in EconPapers)
Date: 2017, Revised 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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