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The economic function of credit rating agencies: what does the watchlist tell us?

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  • Bannier, Christina E.
  • Hirsch, Christian

Abstract

Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract `a la Boot, Milbourn, and Schmeits (2006), inducing the companies on watch to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.

Suggested Citation

  • Bannier, Christina E. & Hirsch, Christian, 2009. "The economic function of credit rating agencies: what does the watchlist tell us?," Frankfurt School - Working Paper Series 124, Frankfurt School of Finance and Management.
    • Handle: RePEc:zbw:fsfmwp:124
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    More about this item

    Keywords

    Credit Rating Agencies; Credit Rating; Watchlist; Rating Review; Market Reaction; Event Study;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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