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Rating opaque borrowers: why are unsolicited ratings lower?

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  • Christina E. Bannier
  • Patrick Behr
  • Andre Güttler

Abstract

This paper examines why unsolicited ratings tend to be lower than solicited ratings. Both self-selection among issuers and strategic conservatism of rating agencies may be reasonable explanations. Analyses of default incidences of non-U.S. borrowers between January 1996 and December 2006 show that rating conservatism may play a role for industrial firms, but self-selection cannot be fully rejected. Neither can it for insurance companies, though data restrictions impede further conclusions. For unsolicited bank ratings, however, we find strong evidence that rating conservatism is an important cause. The downward bias also appears to increase along with banks' opaqueness. Copyright 2010, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 14 (2010)
Issue (Month): 2 ()
Pages: 263-294

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Handle: RePEc:oup:revfin:v:14:y:2010:i:2:p:263-294

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Cited by:
  1. Dion Bongaerts & Martijn Cremers & William Goetzmann, 2008. "Tiebreaker: Certification and Multiple Credit Ratings," Yale School of Management Working Papers amz2394, Yale School of Management, revised 01 Sep 2009.
  2. Scholz, Peter & Walther, Ursula, 2010. "Investment certificates under German taxation: Benefit or burden for structured products' performance?," CPQF Working Paper Series 24, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
  3. Veiga, Carlos & Wystup, Uwe, 2010. "Ratings of structured products and issuers' commitments," CPQF Working Paper Series 26, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
  4. Roßbach, Peter & Karlow, Denis, 2011. "The stability of traditional measures of index tracking quality," Frankfurt School - Working Paper Series 164, Frankfurt School of Finance and Management.
  5. Andriani, Pierpaolo & Herrmann-Pillath, Carsten, 2011. "Transactional innovation and the de-commoditization of the Brazilian coffee trade," Frankfurt School - Working Paper Series 162, Frankfurt School of Finance and Management.
  6. Natalie Packham & Lutz Schloegl & Wolfgang M. Schmidt, 2013. "Credit gap risk in a first passage time model with jumps," Quantitative Finance, Taylor & Francis Journals, vol. 13(12), pages 1871-1889, December.
  7. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, Mahendrarajah, 2013. "The 2007–2009 financial crisis and bank opaqueness," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 55-84.
  8. Detering, Nils & Weber, Andreas & Wystup, Uwe, 2010. "Return distributions of equity-linked retirement plans," CPQF Working Paper Series 27, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
  9. Schaetzle, Dominik, 2011. "Ratingagenturen in der neoklassischen Finanzierungstheorie: Eine Auswertung empirischer Studien zum Informationsgehalt von Ratings," Arbeitspapiere 110, Westfälsche Wilhelms-Universität Münster (WWU), Institut für Genossenschaftswesen.
  10. Byoun, Soku & Fulkerson, Jon A. & Han, Seung Hun & Shin, Yoon S., 2014. "Are unsolicited ratings biased? Evidence from long-run stock performance," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 326-338.
  11. 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.
  12. Heidorn, Thomas & Kahlert, Dennis, 2010. "Implied correlations of iTraxx tranches during the financial crisis," Frankfurt School - Working Paper Series 145, Frankfurt School of Finance and Management.
  13. Hauck, Achim & Neyer, Ulrike, 2014. "Disagreement between rating agencies and bond opacity: A theoretical perspective," Economics Letters, Elsevier, vol. 123(1), pages 82-85.
  14. Frank Strobel, 2014. "Bank Insolvency Risk and Z-Score Measures: A Refinement," Discussion Papers 14-06, Department of Economics, University of Birmingham.
  15. Williams, Gwion & Alsakka, Rasha & ap Gwilym, Owain, 2013. "The impact of sovereign rating actions on bank ratings in emerging markets," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 563-577.
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  17. Umber, Marc P. & Grote, Michael H. & Frey, Rainer, 2010. "Europe integrates less than you think: Evidence from the market for corporate control in Europe and the US," Frankfurt School - Working Paper Series 150, Frankfurt School of Finance and Management.
  18. Mohsen Afsharian & Anna Kryvko & Peter Reichling, 2011. "Efficiency and Its Impact on the Performance of European Commercial Banks," FEMM Working Papers 110018, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  19. Herrmann-Pillath, Carsten, 2010. "Meaning and function in the theory of consumer choice: dual selves in evolving networks," Frankfurt School - Working Paper Series 153, Frankfurt School of Finance and Management.
  20. Gwion Williams & Rasha Alsakka & Owain ap Gwilym, 2013. "The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis," Working Papers 13007, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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