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The economic function of credit rating agencies: what does the watchlist tell us?

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Author Info
Bannier, Christina E.
Hirsch, Christian
Abstract

Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract `a la Boot, Milbourn, and Schmeits (2006), inducing the companies on watch to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function. --

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Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 124.

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Date of creation: 2009
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Handle: RePEc:zbw:fsfmwp:124

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Web page: http://www.frankfurt-school.de/

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Related research
Keywords: Credit Rating Agencies; Credit Rating; Watchlist; Rating Review; Market Reaction; Event Study;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G29 - Financial Economics - - Financial Institutions and Services - - - Other
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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This page was last updated on 2009-12-2.

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