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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 ratings between 1982 and 2004, we find that the overall information content of rating action has indeed increased due to 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.

Suggested Citation

  • Hirsch, Christian & Bannier, Christina E., 2007. "The economics of rating watchlists: evidence from rating changes," Frankfurt School - Working Paper Series 88, Frankfurt School of Finance and Management.
    • Handle: RePEc:zbw:fsfmwp:88
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    More about this item

    Keywords

    Credit rating agencies; watchlist; market reactions; event study;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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