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The Notching Rule for Subordinated Debt and the Information Content of Debt Rating

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  • Kose John
  • S. Abraham Ravid
  • Natalia Reisel

Abstract

"This paper provides new evidence regarding the information content of debt ratings. We show that noninvestment grade subordinated issues are consistently priced too high (the yield is too low), and the reverse is true for some investment grade bonds. We relate this empirical bias to a notching rule of thumb that is used in order to rate subordinated debt without expending additional resources for information production. We propose an explanation for these findings based upon a balance between an attempt to please the companies that pay the raters versus a concern for lawsuits and regulatory investigations should ratings be too optimistic." Copyright (c) 2010 Financial Management Association International.

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Bibliographic Info

Article provided by Financial Management Association International in its journal Financial Management.

Volume (Year): 39 (2010)
Issue (Month): 2 (06)
Pages: 489-513

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Handle: RePEc:bla:finmgt:v:39:y:2010:i:2:p:489-513

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Cited by:
  1. Andres, Christian & Betzer, André & Limbach, Peter, 2014. "Underwriter reputation and the quality of certification: Evidence from high-yield bonds," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 97-115.
  2. Resnick, Bruce G., 2012. "Investor yield and gross underwriting spread comparisons among U.S. dollar domestic, Yankee, Eurodollar, and global bonds," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 445-463.
  3. Christian Andres & André Betzer & Peter Limbach, 2013. "Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds," Schumpeter Discussion Papers SDP13006, Universitätsbibliothek Wuppertal, University Library.

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