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Do rating agencies cater? Evidence from rating-based contracts

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  • Kraft, Pepa

Abstract

I examine whether rating agencies cater to borrowers with rating-based performance-priced loan contracts (PPrating firms). I use data from Moody׳s Financial Metrics on its quantitative adjustments for off-balance-sheet debt and qualitative adjustments for soft factors. In the cross-section and for borrowers experiencing adverse economic shocks, I find that these adjustments are more favorable for PPrating firms than for other firms, consistent with rating agencies catering to the PPrating borrowers. I find that this catering is muted in two circumstances when rating agencies׳ reputational costs are higher than usual: (1) near the investment grade and prime short-term rating thresholds and (2) when Fitch Ratings also provides a rating.

Suggested Citation

  • Kraft, Pepa, 2015. "Do rating agencies cater? Evidence from rating-based contracts," Journal of Accounting and Economics, Elsevier, vol. 59(2), pages 264-283.
  • Handle: RePEc:eee:jaecon:v:59:y:2015:i:2:p:264-283
    DOI: 10.1016/j.jacceco.2014.09.008
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