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Solicited and Unsolicited Credit Ratings : A Global Perspective

Author

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  • Winnie P. H. Poon

    (Asian Development Bank Institute)

  • Kam C. Chan

Abstract

We conducted a global study of the long-term issuer ratings of nonfinancial firms from Standard and Poor's Ratings Services (S&P) for the period 19982003. Specifically, we focused on the solicited versus unsolicited ratings and sample-selection bias in the analysis. Unlike the literature, we adopted an improved method using Wooldridges instrumental-variable approach to mitigate the concern of specification errors in Heckmans model. We found that the probability of seeking a long-term issuer rating is positively related to the size and profitability of the firm, and negatively related to the growth opportunities and debt levels of the firm. The credit rating is positively related to the sovereign rating, size, and profitability of the issuer, and negatively related to the debt ratio of the issuer. Consistent with the literature, we found sample-selection bias in credit ratings. Our findings suggest that the firms with solicited ratings seem to be more profitable, more liquid, and have lower leverage than the issuers with unsolicited ratings. After controlling for sample-selection bias and some key financial ratios, we found that unsolicited firms, on average, seem to have lower long-term issuer ratings.

Suggested Citation

  • Winnie P. H. Poon & Kam C. Chan, 2010. "Solicited and Unsolicited Credit Ratings : A Global Perspective," Finance Working Papers 22815, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:22815
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    References listed on IDEAS

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    1. Winnie P. H. Poon & Michael Firth, 2005. "Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1741-1771.
    2. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    3. Poon, Winnie P. H., 2003. "Are unsolicited credit ratings biased downward?," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 593-614, April.
    4. Patrick Roy, 2013. "Is There a Difference Between Solicited and Unsolicited Bank Ratings and, If So, Why?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(1), pages 53-86, August.
    5. Winnie P. H. Poon & Junsoo Lee & Benton E. Gup, 2009. "Do Solicitations Matter in Bank Credit Ratings? Results from a Study of 72 Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2‐3), pages 285-314, March.
    6. Behr, Patrick & Güttler, André, 2008. "The informational content of unsolicited ratings," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 587-599, April.
    7. Winnie P. H. Poon & Michael Firth, 2005. "Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1741-1771, November.
    8. Lin, Chen & Su, Dongwei, 2008. "Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 405-417, September.
    9. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    10. Naoto Shimoda & Yuko Kawai, 2007. "Credit Rating Gaps in Japan: Differences between Solicited and Unsolicited Ratings, and "Rating Splits"," Bank of Japan Working Paper Series 07-E-11, Bank of Japan.
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    Cited by:

    1. Salvador, Carlos & Pastor, Jose Manuel & Fernández de Guevara, Juan, 2014. "Impact of the subprime crisis on bank ratings: The effect of the hardening of rating policies and worsening of solvency," Journal of Financial Stability, Elsevier, vol. 11(C), pages 13-31.
    2. Patrick Roy, 2013. "Is There a Difference Between Solicited and Unsolicited Bank Ratings and, If So, Why?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(1), pages 53-86, August.
    3. Patrycja Chodnicka-Jaworska, 2017. "Rating kredytowy emitenta i inwestora – porównanie wp³ywu determinant," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 15(66), pages 64-78.
    4. Bernal, Oscar & Girard, Alexandre & Gnabo, Jean-Yves, 2016. "The importance of conflicts of interest in attributing sovereign credit ratings," International Review of Law and Economics, Elsevier, vol. 47(C), pages 48-66.

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    More about this item

    Keywords

    issuer ratings; solicited ratings; unsolicited ratings;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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