 Compensation incentives of credit rating agencies and predictability of changes in bond ratings and financial strength ratingsJournal of Banking & Finance, 2013, vol. 37, issue 9, 3716-3732 Abstract: Over the past decade there has been mixed evidence on the lead–lag relation between issuer-paid and investor-paid credit rating agencies. We investigate the lead–lag relationship for changes in bond ratings (BRs) and financial strength ratings (FSRs), for the US insurance industry, where FSRs impose market discipline. First, we find that changes in issuer-paid BRs are led by changes in investor-paid BRs, even over a period that issuer-paid agencies have improved their timeliness. Second, information flows in both directions between changes in issuer-paid BRs and FSRs. Third, issuer-paid FSRs are predictable by investor-paid BRs. Fourth, the lead effect of investor-paid downgrades is economically significant as it is associated with an unconditional, post-event, 30-day cumulative abnormal return of −4%. This return is a result of investor-paid downgrades in BRs, which predict more downgrades in the following 90days (same period return of −11%). Keywords: Credit rating agencies; Information dissemination; Timeliness; Predictability; Insurance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:9:p:3716-3732 DOI: 10.1016/j.jbankfin.2013.04.032 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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