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

Eduardo Cavallo, Andrew Powell and Roberto Rigobon

No 4601, Research Department Publications from Inter-American Development Bank, Research Department

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, also 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.

JEL-codes: C23 F37 G14 G15 (search for similar items in EconPapers)
Date: 2008-11
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Citations: View citations in EconPapers (13)

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Working Paper: Do Credit Rating Agencies Add Value?: Evidence from the Sovereign Rating Business Institutions (2008)
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