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An empirical analysis of changes in credit rating properties: Timeliness, accuracy and volatility

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  • Cheng, Mei
  • Neamtiu, Monica
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    Abstract

    In recent years, credit rating agencies have faced increased regulatory pressure and investor criticism for their ratings' lack of timeliness. This study investigates whether and how rating agencies respond to such pressure and criticism. We find that the rating agencies not only improve rating timeliness, but also increase rating accuracy and reduce rating volatility. Our findings support the criticism that, in the past, rating agencies did not avail themselves of the best rating methodologies/efforts possible. When their market power is threatened by the possibility of increased regulatory intervention and/or reputation concerns, rating agencies respond by improving their credit analysis.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 47 (2009)
    Issue (Month): 1-2 (March)
    Pages: 108-130

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    Handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:108-130

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    Web page: http://www.elsevier.com/locate/jae

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    Keywords: Credit ratings Rating properties Regulatory pressure Investor criticism;

    References

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    1. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
    2. Beaver, William H. & Shakespeare, Catherine & Soliman, Mark T., 2006. "Differential properties in the ratings of certified versus non-certified bond-rating agencies," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 303-334, December.
    3. Altman, Edward I. & Rijken, Herbert A., 2004. "How rating agencies achieve rating stability," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2679-2714, November.
    4. Kaplan, Robert S & Urwitz, Gabriel, 1979. "Statistical Models of Bond Ratings: A Methodological Inquiry," The Journal of Business, University of Chicago Press, vol. 52(2), pages 231-61, April.
    5. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
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    7. Jorion, Philippe & Liu, Zhu & Shi, Charles, 2005. "Informational effects of regulation FD: evidence from rating agencies," Journal of Financial Economics, Elsevier, vol. 76(2), pages 309-330, May.
    8. Fich, Eliezer M. & Shivdasani, Anil, 2007. "Financial fraud, director reputation, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 86(2), pages 306-336, November.
    9. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
    10. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
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    Cited by:
    1. Xia, Han, 2014. "Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 450-468.
    2. Milidonis, Andreas, 2013. "Compensation incentives of credit rating agencies and predictability of changes in bond ratings and financial strength ratings," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3716-3732.
    3. Kolasinski, Adam C., 2009. "A tale of two intermediaries: A discussion of Johnston, Markov and Ramnath (2009), and Cheng and Neamtiu (2009)," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 131-135, March.
    4. Bannier, Christina E. & Hirsch, Christian W., 2010. "The economic function of credit rating agencies - What does the watchlist tell us?," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3037-3049, December.
    5. Distinguin, Isabelle & Hasan, Iftekhar & Tarazi , Amine, 2012. "Predicting rating changes for banks: How accurate are accounting and stock market indicators?," Research Discussion Papers 15/2012, Bank of Finland.
    6. Erik Berwart & Massimo Guidolin & Andreas Milidonis, 2013. "An Empirical Analysis of Changes in the Relative Timeliness of Issuer-Paid vs. Investor-Paid Ratings," Working Papers 482, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Blakespoor, Elizabeth & Linsmeier, Thomas J. & Petroni, Kathy & Shakespeare, Catherine, 2012. "Fair Value Accounting for Financial Instruments: Does It Improve the Association between Bank Leverage and Credit Risk?," Research Papers 2107, Stanford University, Graduate School of Business.
    8. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Working Papers 13-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    9. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-26, Spring.

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