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Tightening credit standards: the role of accounting quality

Author

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  • Philippe Jorion

    (University of California at Irvine)

  • Charles Shi

    (University of California at Irvine)

  • Sanjian Zhang

    (Lehigh University)

Abstract

Over the latest 20 years, the average credit rating of U.S. corporations has trended down. Blume et al. (1998, Journal of Finance, 53, 1389–1413.) attribute this trend to a tightening of credit standards by agencies. We reexamine the observed decreases in credit ratings in several ways. First, we show that this downward trend does not apply to speculative-grade issuers. Second, our analysis of investment-grade issuers suggests that the apparent tightening of standards can be attributed primarily to changes in accounting quality over time. After incorporating changing accounting quality, we find no evidence that rating agencies have tightened their credit standards.

Suggested Citation

  • Philippe Jorion & Charles Shi & Sanjian Zhang, 2009. "Tightening credit standards: the role of accounting quality," Review of Accounting Studies, Springer, vol. 14(1), pages 123-160, March.
    • Handle: RePEc:spr:reaccs:v:14:y:2009:i:1:d:10.1007_s11142-007-9054-z
    DOI: 10.1007/s11142-007-9054-z
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