Do Credit Rating Agencies Add Value?: Evidence from the Sovereign Rating Business Institutions

Eduardo Cavallo, Andrew Powell and Roberto Rigobon

No 1634, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: If rating agencies add no new information to markets, their actions are not a public policy concern. But as rating changes may be anticipated, testing whether ratings add value is not straightforward. This paper argues that ratings and spreads are both noisy signals of fundamentals and suggest ratings add value if, controlling for spreads, they help explain other variables. The paper additionally analyzes the different actions (ratings and outlooks) of the three leading agencies for sovereign debt, considering the differing effects of more or less anticipated events. The results are consistent across a wide range of tests. Ratings do matter and hence how the market for ratings functions may be a public policy concern.

Keywords: WP-647 (search for similar items in EconPapers)
JEL-codes: C23 F37 G14 G15 (search for similar items in EconPapers)
Date: 2008-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:1634

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