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The Notching Rule for Subordinated Debt and the Information Content of Debt Rating

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  • Kose John
  • S. Abraham Ravid
  • Natalia Reisel

Abstract

"This paper provides new evidence regarding the information content of debt ratings. We show that noninvestment grade subordinated issues are consistently priced too high (the yield is too low), and the reverse is true for some investment grade bonds. We relate this empirical bias to a notching rule of thumb that is used in order to rate subordinated debt without expending additional resources for information production. We propose an explanation for these findings based upon a balance between an attempt to please the companies that pay the raters versus a concern for lawsuits and regulatory investigations should ratings be too optimistic." Copyright (c) 2010 Financial Management Association International.

Suggested Citation

  • Kose John & S. Abraham Ravid & Natalia Reisel, 2010. "The Notching Rule for Subordinated Debt and the Information Content of Debt Rating," Financial Management, Financial Management Association International, vol. 39(2), pages 489-513, June.
  • Handle: RePEc:bla:finmgt:v:39:y:2010:i:2:p:489-513
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    Cited by:

    1. Resnick, Bruce G., 2012. "Investor yield and gross underwriting spread comparisons among U.S. dollar domestic, Yankee, Eurodollar, and global bonds," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 445-463.
    2. repec:bla:jfnres:v:39:y:2016:i:4:p:329-358 is not listed on IDEAS
    3. Attaoui, Sami & Poncet, Patrice, 2015. "Write-Down Bonds and Capital and Debt Structures," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 97-119.
    4. Christian Andres & André Betzer & Peter Limbach, 2013. "Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds," Schumpeter Discussion Papers SDP13006, Universitätsbibliothek Wuppertal, University Library.
    5. Andres, Christian & Betzer, André & Limbach, Peter, 2014. "Underwriter reputation and the quality of certification: Evidence from high-yield bonds," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 97-115.

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