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The economics of rating watchlists: Evidence from rating changes

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  • Hirsch, Christian
  • Bannier, Christina E.

Abstract

Generally, information provision and certification have been identified as the major economic functions of rating agencies. This paper analyzes whether the “watchlist (rating review) instrument has extended the agencies' role towards a monitoring position, as proposed by Boot, Milbourn, and Schmeits (2006). Using a data set of Moody's rating history between 1982 and 2004, we find that the overall information content of rating action has indeed increased since the introduction of the watchlist procedure. Our findings suggest that rating reviews help to establish implicit monitoring contracts between agencies and borrowers and as such enable a finer partition of rating information, thereby contributing to a higher information quality. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/02.

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Date of creation: 2007
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Handle: RePEc:zbw:cfswop:200802

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Keywords: Credit Rating Agencies; Watchlist; Market Reactions; Event Study;

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  2. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
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