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More analysts, better ratings: Do rating agencies invest enough in less developed countries?

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Abstract

Rating agencies' track record is good in developed countries but poor in emerging economies. Why? Given the almost-monopolistic structure of the industry, we conjecture that agencies might underinvest in information gathering. We propose an indicator quantifying the agencies' effort to gather information and assess whether greater effort affects rating levels. We detect: (i) absolute underinvestment for non-OECD sovereigns (less effort in spite of greater opaqueness); (ii) relative underinvestment for non-OECD firms compared with OECD ones (though the former receive a larger effort, more intense effort boosts firm ratings in non-OECD countries while depressing them in OECD countries).

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VII (2004)
Issue (Month): (May)
Pages: 77-98

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Handle: RePEc:cem:jaecon:v:7:y:2004:n:1:p:77-98

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Related research

Keywords: sovereign risk; credit ratings; rating agencies' effort;

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References

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  1. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(5), pages 1011-1028, May.
  2. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  3. Ferri, Giovanni & Liu, Li-Gang & Majnoni, Giovanni, 2001. "The role of rating agency assessments in less developed countries: Impact of the proposed Basel guidelines," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(1), pages 115-148, January.
  4. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  5. Reinhart, Carmen & Levich, Richard & Majoni, Giovanni, 2002. "Ratings, rating agencies and the global financial system: Summary and policy implications," MPRA Paper 13249, University Library of Munich, Germany.
  6. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers, Bank of England 133, Bank of England.
  7. W. Braddock Hickman, 1960. "Statistical Measures of Corporate Bond Financing Since 1900," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number hick60-1.
  8. Cantor, Richard & Packer, Frank, 1997. "Differences of opinion and selection bias in the credit rating industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 21(10), pages 1395-1417, October.
  9. Giovanni Ferri & Li-Gang Liu, 2003. "How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?," Asian Economic Papers, MIT Press, MIT Press, vol. 2(3), pages 30-56.
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Citations

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Cited by:
  1. Giovanni Ferri & Li-Gang Liu, 2003. "How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?," Asian Economic Papers, MIT Press, MIT Press, vol. 2(3), pages 30-56.
  2. Hartarska, Valentina M., 2006. "Rating in Microfinance: Cross-Country Evidence," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia, International Association of Agricultural Economists 25506, International Association of Agricultural Economists.
  3. Giovanni Ferri & Andrea Morone, 2008. "The Effect of Rating Agencies on Herd Behaviour," EERI Research Paper Series, Economics and Econometrics Research Institute (EERI), Brussels EERI_RP_2008_21, Economics and Econometrics Research Institute (EERI), Brussels.
  4. Alexandra Tabova, 2013. "Portfolio diversification and the cross-sectional distribution of foreign investment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1091, Board of Governors of the Federal Reserve System (U.S.).
  5. Elizabeth Asiedu & Yi Jin & Boaz Nandwa, 2009. "Does Foreign Aid Mitigate the Adverse Effect of Expropriation Risk on Foreign Direct Investment?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS, University of Kansas, Department of Economics 200905, University of Kansas, Department of Economics.
  6. Mattarocci, Gianluca, 2005. "Il rapporto tra impresa e agenzia di rating: la soluzione del multi-rating," MPRA Paper 4295, University Library of Munich, Germany, revised Mar 2005.
  7. Hartarska, Valentina & Nadolnyak, Denis, 2008. "Does rating help microfinance institutions raise funds? Cross-country evidence," International Review of Economics & Finance, Elsevier, Elsevier, vol. 17(4), pages 558-571, October.

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