Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

By Han, Seung Hun; Pagano, Michael S. et al. | Financial Management, Winter 2012 | Go to article overview

Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt


Han, Seung Hun, Pagano, Michael S., Shin, Yoon S., Financial Management


Why do foreign firms obtain credit ratings by global rating agencies rather than from their home country's rating agencies even though global raters typically assign lower credit ratings when these foreign firms issue bonds in their home currencies? We find that bonds rated by a global agency decreased yields 11-14 basis points (bps) when compared to those rated by Japanese rating agencies but, during the 2007-2009 financial crisis, the yields on these Japanese bonds increased 12-17 bps, thus fully negating the advantage of obtaining a bond rating from a global rater This suggests that the reputation of global rating agencies declined during the 2007-2009 crisis period.

**********

Credit rating agencies evaluate debt issuers and specific bond issues in two ways: 1) by assessing default probabilities with private and public information provided by issuers, and 2) informing financial markets of their evaluations through bond ratings. Both investors and issuers believe that rating agencies have specialized skills related to assessing credit worthiness and default risk. Thus, rating agencies help reveal important additional information about a firm to the credit markets in the form of ratings and help reduce information asymmetry between the issuing firm and potential investors in the new debt issue. (1) The influence of global rating agencies, such as Moody's and S&P, is quite substantial in that they control nearly 80% of the global credit ratings market (Wall Street Journal, 2003). (2)

Although there is some evidence regarding the influence of global and domestic rating agencies in domestic stock markets, more can be done in this area, particularly with respect to the second largest bond market in the world, Japan. (3) For example, Li, Shin, and Moore (2006) find that the stock prices of Japanese firms react more strongly to rating downgrades by global rating agencies than by the two major Japanese rating agencies. Accordingly, Li et al. (2006) suggest that global rating agencies are more influential and have a greater reputation than domestic agencies in Japan. In addition, Shin and Moore (2003) determine that the ratings of Japanese firms by global agencies are lower than those assigned by Japanese agencies. (4) Further, Shin and Moore (2008) conclude that even though Moody's and S&P assign lower credit ratings to Canadian firms than DBRS (Dominion Bond Rating Service), a Canadian credit rating agency, the former are more influential than the latter in the Canadian capital market. Therefore, we examine why foreign firms obtain ratings from global agencies in spite of receiving potentially lower ratings. We do this by studying how a rating from a global agency affects the cost of debt for newly issued, yen-denominated Japanese corporate bonds.

The ratings from global agencies, such as S&P and Moody's, are important for several types of investors. For example, when money market mutual funds in the United States purchase commercial paper, they must buy investment-grade issues rated by at least two Nationally Recognized Statistical Rating Agencies (NRSROs). (5) The Securities and Exchange Commission (SEC) also allows commercial banks to use credit ratings assigned by NRSROs in calculating their capital requirements. In addition, the SEC has tried to regulate the ratings of structured credit products such as mortgage-backed securities, asset-backed securities, as well as collateralized debt obligations after the subprime mortgage crisis began in 2007 and is contemplating additional regulations for short- and long-term corporate credit ratings. The SEC issued nine NRSRO certifications as of December 2011 and although Moody's, S&P, and Fitch received NRSRO status in 1975, the two main Japanese rating firms, Rating & Investment Information (R&I) and Japanese Credit Rating Agency (JCR), obtained this recognition in 2007. R&I and JCR are the first non-Anglo-American rating agencies to acquire this NRSRO designation. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.