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Split ratings and debt-signaling in bond markets: A note

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Listed:
  • Ismail, Ashraf
  • Oh, Seunghack
  • Arsyad, Nuruzzaman

Abstract

Split ratings occur when national and international credit rating agencies assign different ratings to the same firm. Employing various proxies for asymmetric information and data from advanced and emerging bond markets, we review the evidence that split ratings are caused by asymmetric information between firms and credit rating agencies. We then apply the debt-signaling model to the split ratings problem, by testing for a systematic relationship between the debt-to-equity ratio and the magnitude of split ratings across countries. We finally test for the existence of an optimal debt-signal, which implies that higher debt-to-equity ratios will reduce the ratings split to an optimal minimum, after which accumulating more debt widens the ratings split. Our results suggest that firms in emerging markets can use the debt-signal up to a maximal point, after which it becomes inefficient.

Suggested Citation

  • Ismail, Ashraf & Oh, Seunghack & Arsyad, Nuruzzaman, 2015. "Split ratings and debt-signaling in bond markets: A note," Review of Financial Economics, Elsevier, vol. 24(C), pages 36-41.
    • Handle: RePEc:eee:revfin:v:24:y:2015:i:c:p:36-41
    DOI: 10.1016/j.rfe.2014.12.003
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    2. Jiang, Xianfeng & Packer, Frank, 2019. "Credit ratings of Chinese firms by domestic and global agencies: Assessing the determinants and impact," Journal of Banking & Finance, Elsevier, vol. 105(C), pages 178-193.

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    More about this item

    Keywords

    Credit ratings; Asymmetric information; Debt signal; Bond markets;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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