Post by Sapphire Capital on Feb 19, 2009 20:10:47 GMT 4
Multiple Ratings and Credit Spreads
Dion Bongaerts
University of Amsterdam - Finance Group
Martijn Cremers
Yale School of Management
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
October 1, 2008
Yale ICF Working Paper No. 08-27
Abstract:
This paper explores the role played by multiple credit rating agencies (CRAs) in the issuance of corporate bonds. Moody's, S&P and Fitch operate in a competitive setting with market demand for both credit information and the certification value of a high rating. Each has some degree of market power and strategic options. In this paper, we empirically document the outcome of this competitive interaction over the period 2002 to 2006. We find that virtually all bonds in our sample are rated by both Moody's and Standard and Poors (S&P), and between 40% and 60% of the bonds are also rated by Fitch. This apparent redundancy in information production has long been a puzzle. We consider three explanations for why issuers apply for a third rating: Information Production, Adverse Selection and Certification with respect to regulatory constraints. Using ratings and credit spread regressions, we find evidence in favor of Certification only. Our results suggest that Fitch ratings are principally used to comply with regulatory or rules-based constraints involving the sharp investment-grade - high-yield boundary.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1310759_code223089.pdf?abstractid=1307782&mirid=1
Dion Bongaerts
University of Amsterdam - Finance Group
Martijn Cremers
Yale School of Management
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
October 1, 2008
Yale ICF Working Paper No. 08-27
Abstract:
This paper explores the role played by multiple credit rating agencies (CRAs) in the issuance of corporate bonds. Moody's, S&P and Fitch operate in a competitive setting with market demand for both credit information and the certification value of a high rating. Each has some degree of market power and strategic options. In this paper, we empirically document the outcome of this competitive interaction over the period 2002 to 2006. We find that virtually all bonds in our sample are rated by both Moody's and Standard and Poors (S&P), and between 40% and 60% of the bonds are also rated by Fitch. This apparent redundancy in information production has long been a puzzle. We consider three explanations for why issuers apply for a third rating: Information Production, Adverse Selection and Certification with respect to regulatory constraints. Using ratings and credit spread regressions, we find evidence in favor of Certification only. Our results suggest that Fitch ratings are principally used to comply with regulatory or rules-based constraints involving the sharp investment-grade - high-yield boundary.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1310759_code223089.pdf?abstractid=1307782&mirid=1