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Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings

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  • Winnie P. H. Poon
  • Michael Firth

Abstract

In recent years credit rating agencies have started rating firms who have not asked for a rating. Recipients of unsolicited ratings argue that the assigned ratings are too low and reflect a lack of comprehensive knowledge of the rated firms. We set out to examine these claims using a comprehensive and international sample of 1,060 bank ratings. Our results show that there is a significant difference in the distributions of ratings, and the shadow group has lower ratings. The results also indicate that banks that received shadow ratings are smaller and have weaker financial profiles than banks that have other ratings. This explains, in part, the lower ratings. In addition, we develop a model to explain bank ratings. The two‐step treatment effects model shows that bank size, profitability, asset quality, liquidity, and sovereign credit risk are important factors in determining bank ratings.

Suggested Citation

  • Winnie P. H. Poon & Michael Firth, 2005. "Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1741-1771, November.
    • Handle: RePEc:bla:jbfnac:v:32:y:2005:i:9-10:p:1741-1771
    DOI: 10.1111/j.0306-686X.2005.00646.x
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    References listed on IDEAS

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    1. Pu Liu & Fazal J. Seyyed & Stanley D. Smith, 1999. "The Independent Impact of Credit Rating Changes – The Case of Moody's Rating Refinement on Yield Premiums," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(3‐4), pages 337-363, April.
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    3. Pu Liu & Fazal J. Seyyed & Stanley D. Smith, 1999. "The Independent Impact of Credit Rating Changes - The Case of Moody's Rating Refinement on Yield Premiums," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(3-4), pages 337-363.
    4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    5. Patrick Van Roy, 2005. "Is there a difference in treatment between solicited and unsolicited bank ratings and, if so, why?," Finance 0509012, University Library of Munich, Germany.
    6. Poon, Winnie P. H., 2003. "Are unsolicited credit ratings biased downward?," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 593-614, April.
    7. Reiter, Sara A & Ziebart, David A, 1991. "Bond Yields, Ratings, and Financial Information: Evidence from Public Utility Issues," The Financial Review, Eastern Finance Association, vol. 26(1), pages 45-73, February.
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