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The Informational Content of Bond Ratings


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  • Louis H. Ederington
  • Jess B. Yawitz
  • Brian E. Roberts
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    This paper explores the risk structure of interest rates. More specifically, we ask whether yields on industrial and commercial bonds indicate that market participants base their evaluations of a bond issue's default risk on agency ratings or on publically available financial statistics. Using a non-linear least squares procedure, we relate the yield to maturity to Moody's rating, Standard & Poor's rating, and accounting measures of credit worthiness such as coverage and leverage. We find that market yields are significantly correlated with both the ratings and with a set of readily available financial accounting statistics. These results indicate (1) that market participants base their evaluations of an issue's credit worthiness on more than the agencies' ratings and (2) that the ratings bring some information to the market above and beyond that contained in the set of accounting variables. In addition, our results suggest that the market views Moody's and S&P's ratings as equally reliable measures of risk. Although the accounting measures also affect yields on new or recently reviewed issues, our analysis suggests that the market may pay more attention to the accounting measures and less to the ratings if the rating has not been reviewed recently.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1323.

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    Date of creation: Apr 1984
    Date of revision:
    Publication status: published as JFR, Vol. 10, no. 3 (1987): 211-226.
    Handle: RePEc:nbr:nberwo:1323

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    1. Griffin, Paul A & Sanvicente, Antonio Z, 1982. " Common Stock Returns and Rating Changes: A Methodological Comparison," Journal of Finance, American Finance Association, vol. 37(1), pages 103-19, March.
    2. Grier, Paul & Katz, Steven, 1976. "The Differential Effects of Bond Rating Changes among Industrial and Public Utility Bonds by Maturity," The Journal of Business, University of Chicago Press, vol. 49(2), pages 226-39, April.
    3. West, Richard R, 1973. "Bond Ratings, Bond Yields and Financial Regulation: Some Findings," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 159-68, April.
    4. Bierman, Harold & Hass, Jerome E., 1975. "An Analytical Model of Bond Risk Differentials," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(05), pages 757-773, December.
    5. Yawitz, Jess B., 1977. "An Analytical Model of Interest Rate Differentials and Different Default Recoveries," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(03), pages 481-490, September.
    6. Weinstein, Mark, 1981. "The Systematic Risk of Corporate Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(03), pages 257-278, September.
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    Cited by:
    1. Boot, Arnoud W A & Milbourn, Todd, 2002. "Credit Ratings as Coordination Mechanism," CEPR Discussion Papers 3331, C.E.P.R. Discussion Papers.
    2. Dr. Misnen Ardiansyah, M.Si Author_Email: & Abdul Qoyum, 2011. "Testing The Semi-Strong Form Efficiency Of Islamic Capital Market With Response To Information Content Of Dividend Announcement- A Study In Jakarta Islamic Index," International Conference on Management (ICM 2011) Proceeding 2011-094-374, Conference Master Resources.


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