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More analysts, better ratings: Do rating agencies invest enough in less developed countries?

Rating agencies' track record is good in developed countries but poor in emerging economies. Why? Given the almost-monopolistic structure of the industry, we conjecture that agencies might underinvest in information gathering. We propose an indicator quantifying the agencies' effort to gather information and assess whether greater effort affects rating levels. We detect: (i) absolute underinvestment for non-OECD sovereigns (less effort in spite of greater opaqueness); (ii) relative underinvestment for non-OECD firms compared with OECD ones (though the former receive a larger effort, more intense effort boosts firm ratings in non-OECD countries while depressing them in OECD countries).

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VII (2004)
Issue (Month): (May)
Pages: 77-98

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Handle: RePEc:cem:jaecon:v:7:y:2004:n:1:p:77-98
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  1. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," Harvard Institute of Economic Research Working Papers 1768, Harvard - Institute of Economic Research.
    • La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
    • Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
    • Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  2. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
  3. G. Ferri & L.-G. Liu & J. E. Stiglitz, 1999. "The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 335-355, November.
  4. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  5. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  6. Ferri, Giovanni & Liu, Li-Gang & Majnoni, Giovanni, 2001. "The role of rating agency assessments in less developed countries: Impact of the proposed Basel guidelines," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 115-148, January.
  7. Cantor, Richard & Packer, Frank, 1997. "Differences of opinion and selection bias in the credit rating industry," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1395-1417, October.
  8. W. Braddock Hickman, 1960. "Statistical Measures of Corporate Bond Financing Since 1900," NBER Books, National Bureau of Economic Research, Inc, number hick60-1, August.
  9. Reinhart, Carmen & Levich, Richard & Majoni, Giovanni, 2002. "Ratings, rating agencies and the global financial system: Summary and policy implications," MPRA Paper 13249, University Library of Munich, Germany.
  10. Giovanni Ferri & Li-Gang Liu, 2003. "How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?," Asian Economic Papers, MIT Press, vol. 2(3), pages 30-56.
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