Credit Ratings and Their Information Value: Evidence from the Recent Financial Crisis

This paper examines the accuracy and timeliness of credit ratings in explaining the financial health of debt issuers over the recent financial crisis. Using annual financial statement data and macroeconomic indicators covering 2005-2013 for 2500 financial and non-financial institutions, this paper identifies the determinants of credit rating changes by two incumbent rating agencies: Moody’s and Standard & Poor’s. Empirical evidence suggests that while Moody’s is consistently more conservative in the assessment of default risk for non-financial institutions, Standard and Poor’s is consistently more conservative in the assessment of default risk for financial institutions. Fitch’s increasing market share deepens the rating disagreement between S&P and Moody’s. The results also suggest that sovereign ceilings cease to be restrictive for non-financial institutions over the recent financial crisis. S&P is a follower in its rating actions when compared to Moody’s for both financial and nonfinancial institutions.