Estimating Unobserved Soft Adjustment in Credit Rating Models: Before and after the Dodd–Frank Act*

Zhutong Gu, Yixiao Jiang and Shuyang Yang

Journal of Financial Econometrics, 2023, vol. 21, issue 5, 1791-1819

Abstract: Credit Rating Agencies (CRAs) adjust preliminary bond ratings with knowledge beyond publicly available information. These unobserved “soft adjustments” may reflect material nonpublic information and rating biases due to conflicts of interest, making certain bond characteristics endogenous. We model and quantify soft adjustments as bond-specific thresholds in a semiparametric ordered-response model and exploit ownership structures of bond-issuers to control for endogeneity. Relying on the shift restrictions, we develop a location estimator for models of ordered choices with correlated heterogenous thresholds. Using Moody’s initial ratings from 2000 to 2016, we find a significant reduction of soft adjustment after the Dodd–Frank reform.

Keywords: credit rating; private information; ordered response model; semiparametric estimation; financial reform (search for similar items in EconPapers)
JEL-codes: C14 C51 D82 G24 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbac024 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
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:oup:jfinec:v:21:y:2023:i:5:p:1791-1819.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().