Is there a difference in treatment between solicited and unsolicited bank ratings and, if so, why?
This paper analyses the effect of soliciting a rating on the rating outcome of banks. This type of analysis sheds light on an important policy question, namely whether there is a difference in treatment between banks which request a rating and those which do not. Using a sample of Asian banks rated by Fitch Ratings, I find evidence that unsolicited ratings tend to be lower than solicited ones after accounting for differences in financial and non-financial characteristics between banks. This downward bias does not seem to be explained by the self-selection hypothesis, which states that banks with more favourable private information self-select into the solicited group because they can obtain higher ratings by doing so. Rather, unsolicited ratings appear to be lower because they are only based on public information and, as a result, they tend to be more conservative than solicited ones. This is shown by testing the public disclosure hypothesis, which states that the difference in treatment between solicited and unsolicited ratings disappears when banks with an unsolicited rating release enough public information to compensate for the absence of private information. Overall, the findings of this study have important policy implications for the reform of the credit rating industry and for the Third Pillar of the New Basel Accord.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jason ABREVAYA & Jerry A. HAUSMAN, 1999. "Semiparametric Estimation with Mismeasured Dependent Variables: An Application to Duration Models for Unemployment Spells," Annales d'Economie et de Statistique, ENSAE, issue 55-56, pages 243-275.
- Heckman, James J, 1979.
"Sample Selection Bias as a Specification Error,"
Econometric Society, vol. 47(1), pages 153-61, January.
- Martin Feinberg & Roger Shelor & James Jiang, 2004. "The Effect of Solicitation and Independence on Corporate Bond Ratings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(9-10), pages 1327-1353.
- James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998.
"Characterizing Selection Bias Using Experimental Data,"
Econometric Society, vol. 66(5), pages 1017-1098, September.
- James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998. "Characterizing Selection Bias Using Experimental Data," NBER Working Papers 6699, National Bureau of Economic Research, Inc.
- Poon, Winnie P. H., 2003. "Are unsolicited credit ratings biased downward?," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 593-614, April.
- 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.
- H. Kent Baker & Sattar A. Mansi, 2002. "Assessing Credit Rating Agencies by Bond Issuers and Institutional Investors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(9&10), pages 1367-1398.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0509012. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.