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Multiple ratings and credit standards: differences of opinion in the credit rating industry

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  • Richard Cantor
  • Frank Packer

Abstract

Rating-dependent financial regulators assume that the same letter ratings from different agencies imply the same levels of default risk. Most "third" agencies, however, assign significantly higher ratings on average than Moody's and Standard & Poor's. We show that, contrary to the claims of some rating industry professionals, sample selection bias can account for at most half of the observed average difference in ratings. We also investigate the economic rationale for using multiple rating agencies. Among the many variables considered, only size and bond-issuance history are consistently related to the probability of an issuer seeking third ratings. The probability ties to improve their standing under rating-dependent regulations.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 12.

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Date of creation: 1996
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Handle: RePEc:fip:fednsr:12

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Related research

Keywords: Credit ; Corporate bonds ; Sampling (Statistics);

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Cited by:
  1. Miloš Božovic & Branko Uroševic & Boško Živkovic, 2011. "Credit Rating Agencies and Moral Hazard," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(2), pages 219-227, June.
  2. Santos, Joao A.C., 2006. "Why firm access to the bond market differs over the business cycle: A theory and some evidence," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2715-2736, October.
  3. Shin, Yoon S. & Moore, William T., 2003. "Explaining credit rating differences between Japanese and U.S. agencies," Review of Financial Economics, Elsevier, vol. 12(4), pages 327-344.
  4. Daryl Koehn & Joe Ueng, 2005. "Evaluating the Evaluators: Should Investors Trust Corporate Governance Metrics Ratings?," Journal of Management and Governance, Springer, vol. 9(2), pages 111-128, 06.
  5. White, Lawrence J., 2005. "Good Intentions Gone Awry: A Policy Analysis of the SEC's Regulation of the Bond Rating Industry," Working paper 298, Regulation2point0.
  6. Cantor, Richard & Packer, Frank, 1997. "Differences of opinion and selection bias in the credit rating industry," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1395-1417, October.
  7. Ying Yi Tsai & Li-Gang Liu, 2010. "Emergence of Rating Agencies : Implications for Establishing a Regional Rating Agency in Asia," Finance Working Papers 22824, East Asian Bureau of Economic Research.
  8. Alexandr Karminsky & Anatoly Peresetsky, 2009. "Ratings as Measure of Financial Risk: Evolution, Function and Usage," Journal of the New Economic Association, New Economic Association, issue 1-2, pages 86-102.
  9. Morales, Jorge & Tuesta, Pedro, 1998. "Calificaciones de crédito y riesgo país," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 3.
  10. David Brookfield & Phillip Ormrod, 2000. "Credit agency regulation and the impact of credit ratings in the international bond market," The European Journal of Finance, Taylor & Francis Journals, vol. 6(4), pages 311-331.

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