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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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  1. Arnoud W. A. Boot & Todd T. Milbourn, 2002. "Credit Ratings as Coordination Mechanisms," William Davidson Institute Working Papers Series 457, William Davidson Institute at the University of Michigan.
  2. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, Elsevier, vol. 30(2), pages 253-272, December.
  3. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
  4. Loffler, Gunter, 2005. "Avoiding the rating bounce: why rating agencies are slow to react to new information," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 56(3), pages 365-381, March.
  5. Cantor, Richard, 2004. "An introduction to recent research on credit ratings," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(11), pages 2565-2573, November.
  6. Marshall E. Blume & Felix Lim & A. Craig Mackinlay, 1998. "The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?," Journal of Finance, American Finance Association, American Finance Association, vol. 53(4), pages 1389-1413, 08.
  7. repec:fth:pennfi:67 is not listed on IDEAS
  8. James W. Wansley & Terrence M. Clauretie, 1985. "The Impact Of Creditwatch Placement On Equity Returns And Bond Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 8(1), pages 31-42, 03.
  9. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
  10. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, . "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 03-98, Wharton School Rodney L. White Center for Financial Research.
  11. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(3), pages 469-506, March.
  12. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, . "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 3-98, Wharton School Rodney L. White Center for Financial Research.
  13. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
  14. Michael P. Murray, 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(4), pages 111-132, Fall.
  15. 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, Elsevier, vol. 28(11), pages 2789-2811, November.
  16. Goh, Jeremy C. & Ederington, Louis H., 1999. "Cross-sectional variation in the stock market reaction to bond rating changes," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 39(1), pages 101-112.
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