Sovereign Ratings and Investor Behavior

José Jorge ()
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José Jorge: Faculdade de Economia, Universidade do Porto, cef.up

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: Our premise in this paper is that credit rating agencies account for roll-over risk, which in turn depends on credit ratings. Credit ratings influence subjective beliefs and roll-over decisions, which then influence borrower’s creditworthiness and affect credit rating agencies’ pronouncements. These effects are stronger when the borrower is in distress, or when credit ratings are more precise than other sources of financial information. In these cases, rating events have a disproportionate impact on investor behavior, thus making credit quality difficult to assess. We extend our analysis to investigate the role of financial prices, the case in which agencies follow investor opinion, the impact of rating-contingent regulation, and the strategic behavior of credit rating agencies.

Keywords: Keywords: Sovereign ratings; roll-over risk; creditor coordination (search for similar items in EconPapers)
JEL-codes: D82 G18 G24 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2016-01
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