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The economic function of credit rating agencies: what does the watchlist tell us?

Christina E. Bannier and Christian Hirsch

No 124, Frankfurt School - Working Paper Series from Frankfurt School of Finance and Management

Abstract: Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract `a la Boot, Milbourn, and Schmeits (2006), inducing the companies on watch to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.

Keywords: Credit Rating Agencies; Credit Rating; Watchlist; Rating Review; Market Reaction; Event Study (search for similar items in EconPapers)
JEL-codes: G14 G29 G33 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-rmg
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Journal Article: The economic function of credit rating agencies - What does the watchlist tell us? (2010) Downloads
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