The economic function of credit rating agencies - What does the watchlist tell us?

Christina Bannier and Christian Hirsch

Journal of Banking & Finance, 2010, vol. 34, issue 12, 3037-3049

Abstract: Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract á la Boot et al. (2006), inducing the companies "on watch" to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.

Keywords: Credit; rating; agencies; Credit; rating; Watchlist; Rating; review; Event; study (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (63)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00260-8
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The economic function of credit rating agencies: what does the watchlist tell us? (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:12:p:3037-3049

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().