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The roles of rating outlooks: the predictor of creditworthiness and the monitor of recovery efforts

Winnie P. H. Poon () and Jianfu Shen ()
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Winnie P. H. Poon: Lingnan University
Jianfu Shen: The Hong Kong Polytechnic University

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 3, No 9, 1063-1091

Abstract: Abstract Using a comprehensive U.S. rating sample from S&P between 1981 and 2015, we examine the information content, responsiveness to credit risk and recovery efforts associated with rating outlooks. We find that rating outlooks (and credit watches) have important information content and are significantly associated with creditworthiness, measured by expected default frequency. More importantly, we show that by assigning negative outlooks, credit rating agencies induce some issuers to exert recovery efforts to prevent subsequent downgrades. The findings support the theoretical prediction of Boot et al. (Rev Financ Stud 19(1):81–118, 2006) that credit rating actions serve as a coordination mechanism between rating agencies and issuers.

Keywords: Rating outlook; Information content; Credit risk; Recovery effort (search for similar items in EconPapers)
JEL-codes: G14 G20 G24 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11156-019-00868-7

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