Credit agency regulation and the impact of credit ratings in the international bond market

Abstract

The use of credit ratings in financial and other legal documents — both in the USA and Europe —, has led to a situation in which the major rating agencies have become (largely unwilling) participants in the legislative process. This situation has become partly formalized in the US (and is being repeated elsewhere in the European Union, Eastern Europe and Latin America) through the creation of officially 'recognized' agencies whose ratings now carry the imprimatur of the Securities and Exchange Commission. The purpose of this paper is to contribute to the debate on the necessity for formal legal status to be sustained in the market for bond credit ratings. In this context, the criteria for a credible rating agency are examined and evidence is provided on one element of the criteria which is under-researched: namely, the impact of the ratings in the market place. The influence of rating agencies in international capital markets is assessed through an analysis of the impact of ratings on the yields of bonds, represented by a comprehensive sample of actively traded debt. The sample contains analysis of ratings introductions on both new and seasoned debt and also examines the impact of ratings revisions. It is concluded that official recognition has no market-based role and it is argued that ratings are used by regulators because of the success of the major agencies in performing their market function.Credit Ratings Credit Agencies Formal Legal Status Impact On Yields Of Bonds,

The Impact of Risk Management in Credit Rating Agencies

“…The sustainability of the firm demonstrates creditworthiness as part of its financial performance. Hull and White (2012) concluded that risk measures (CRA) are not value measures, ratings (S&P and Fitch) create the illusion of a free lunch, and the securitization that was observed is consistent with structures exploiting the criteria used by the rating agencies, whereas Brookfield and Ormrod (2000) claimed that official recognition of the rating of bonds/securities has no market-based role. In addition, Angilella and Mazzu (2015) reiterated that a multiple-criteria decision aid is appropriate in situations in which there is a lack or absence of analytic quantitative techniques for constructing judgemental credit assessment models.…”

A Theoretical and Empirical Review of the EU Regulation on Credit Rating Agencies: In Search of Truth, Not Scapegoats

“…146 An "outlook" contains an opinion on the likely direction of an issuer's credit quality over the medium term, while "reviews" constitute a subset of outlooks and form much stronger statements about the future direction of an issuer's credit quality, i.e., they imply that credit quality has changed to the point that the rating may need to be revised (see Hamilton and Cantor, 2004, p. 4). 147 See also Barron et al (1997); Ederington and Goh (1998);Ferri et al (1999); Kish et al (1999); Brookfield and Ormrod (2000); Gropp and Richards (2001); Hamilton and Cantor (2004); Sy (2004); Purda (2007); Ismailescu and Kazemi (2010); Bannier and Hirsch (2010). The results also hold for ratings of sovereign debt (see n. 13 and accompanying text).…”

“…147 147 See also Barron et al (1997); Ederington and Goh (1998); Ferri et al (1999); Kish et al (1999); Brookfield and Ormrod (2000); Gropp and Richards (2001); Hamilton and Cantor (2004); Sy (2004); Purda (2007); Ismailescu and Kazemi (2010); Bannier and Hirsch (2010). The results also hold for ratings of sovereign debt (see n. 13 and accompanying text).…”

Assymetric information and the pricing of sovereign eurobonds: India 1990–1992

“…Some studies such as Hand, Holthausen, and Leftwich (1992), Liu, Seyyed, and Smith (1999), Brookefield and Ormond (2000), Gabbi and Sironi (2005), for example, have argued that rated issuers provide help to mitigate the problems of asymmetric information. 3 Other authors, such as Bancel and Mitoo (2001), Houston and Jones (2002) and Yamori and Baba (2001) suggest that foreign listings, through disclosure requirements, also mitigate the information assymmetries and increase liquidity, thereby reducing borrowing costs.…”