EconPapers    
Economics at your fingertips  
 

Multiple ratings and credit standards: differences of opinion in the credit rating industry

Richard Cantor () and Frank Packer ()

No 9527, Research Paper from Federal Reserve Bank of New York

Abstract: This paper tests whether the tendency of third rating agencies to assign higher ratings than Moody's and Standard & Poor's results from more lenient standards or sample selection bias. More lenient standards might result from incentives to satisfy issuers who are, in fact, the purchasers of the ratings. Selection bias might be important because issuers that expect a low rating from a third agency are unlikely to request one. Our analysis of a broad sample of corporate bond ratings at year-end 1993 reveals that, although sample selection bias appears important, it explains less than half the observed difference in average ratings. The paper also investigates why bond issuers seek ratings in addition to those of Moody's and Standard & Poor's. Contrary to expectations, the probability of obtaining a third rating is not found to be related to levels of ex ante uncertainty over firm default probabilities. In particular, a firm's decision to obtain a third rating appears unrelated to its Moody's and Standard & Poor's ratings or the amount of disagreement between them. Instead, the most important determinants of the decision are a firm's age and size. The results should be of interest to investors and financial market regulators who generally use the ratings of different agencies as if they correspond to similar levels of default risk. In addition, our findings raise a number of questions about the certification role of rating agencies and about the strength of the rating agencies' incentives to maintain a reputation for high quality (accurate) ratings.

Keywords: Credit; Corporate bonds (search for similar items in EconPapers)
Date: 1995
References: Add references at CitEc
Citations: View citations in EconPapers (11) Track citations by RSS feed

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/rese ... arch_papers/9527.pdf (application/pdf)
https://www.newyorkfed.org/medialibrary/media/rese ... rch_papers/9527.html (text/html)

Related works:
Working Paper: Multiple ratings and credit standards: differences of opinion in the credit rating industry (1996) Downloads
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:fip:fednrp:9527

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Research Paper from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-12-02
Handle: RePEc:fip:fednrp:9527