Differences of opinion and selection bias in the credit rating industry

Cantor, Richard; Packer, Frank

doi:10.1016/s0378-4266(97)00024-1

Cited by 257 publications

(147 citation statements)

References 9 publications

Supporting

Mentioning

140

Contrasting

Unclassified

Order By: Relevance

“…We take advantage of a natural experiment, which began in the late 1980's and continued through the 1990's, when the well-known bond rating agency S&P entered the market for insurance ratings. 17 In this section, we present the institutional setting for our tests and describe our data sources. In the following section we discuss our empirical tests and results from (i) univariate comparisons of the stringency standards employed by S&P and A.M. Best; and…”

Section: Institutional Setting and Datamentioning

confidence: 99%

“…Incorporated in 1899, A.M. Best publishes "financial strength ratings" for the majority of U.S. insurers, and, for most of its history, it was the only agency 17 Although our theoretical results could be useful to analyze entry into the bond rating industry, none of the new NRSROs has obtained a significant market share to perform the tests. As noted by White (2002): "A striking fact about the structure of the industry in the U.S. is its persistent fewness of incumbents.…”

Section: Insurance Ratings and Standard And Poor's Entrymentioning

confidence: 99%

See 1 more Smart Citation

Information effect of entry into credit ratings market: The case of insurers' ratings

Doherty

Kartasheva

Phillips

2012

Journal of Financial Economics

113

View full text Add to dashboard Cite

The paper analyzes the effect of competition between credit rating agencies (CRAs) on the information content of ratings. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant designs a rating scale distinct from that of the incumbent. It targets higher-than-average companies in each rating grade of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's (S&P) entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings. The empirical analysis reveals that S&P required higher standards to assign a rating similar to the one assigned by A.M. Best and that higher-than-average quality insurers in each rating category of A.M. Best chose to receive a second rating from S&P. Keywords ratings, competition, information disclosure, insurance Disciplines Economics | FinanceThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/bepp_papers/121Electronic copy available at: http://ssrn.com/abstract=1101700Electronic copy available at: http://ssrn.com/abstract=1101700Information effect of entry into credit ratings market:The case of insurers' ratings * Neil A. Doherty † Anastasia V. Kartasheva ‡ Richard D. Phillips § August 21, 2011Abstract This paper analyzes the optimal entry strategy of a credit rating agency (CRA) to a market served by the incumbent. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant targets higher-than-average companies in each rating class of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings.Keywords: rating agency, entry, competition, precision and disclosure of information, insurance. 1Electronic copy available at: http://ssrn.com/abstract=1101700Electronic copy available at: http://ssrn.com/abstract=1101700Significant debate exists regarding the role that competition should play in the market for credit ratings. Representatives from the credit rating agencies (CRAs) themselves argue that reducing barriers to entry would eventually lead to reduced disclosure of information as the new entrants engage in "race to the bottom" strategies in order to sell Considering the unique dynamics of our market, historically new market entrants and marginal participants have sought to make their products more attractive to issuers by offering higher ratings than do more established market participants. Some new entrants might be inclined to try to compete in this manner because of the ease with which such a strategy could be implemented and the short-term benefits that might accrue to the en...

show abstract

Section: Institutional Setting and Datamentioning

confidence: 99%

Section: Insurance Ratings and Standard And Poor's Entrymentioning

confidence: 99%

Information effect of entry into credit ratings market: The case of insurers' ratings

Doherty

Kartasheva

Phillips

2012

Journal of Financial Economics

113

View full text Add to dashboard Cite

show abstract

“…The authors Yoon S. Shin and William T. Moore point out that the rating scores given by the three largest agencies are usually lower than the scores given to Japanese companies by Japanese rating agencies (Shin & Moore, 2003). Richard Cantor and Frank Packer stress that the differences may result from the different models used to provide credit rating assessments (Cantor & Packer, 1997). Miles Livingston, Andy Naranjo and Lei Zhou note that in the case of split ratings of bonds issued by a given company there is a greater probability that the rating score shall be changed in the future (usually up to a year) (Livingston et al, 2008).…”

Section: Methodsmentioning

confidence: 99%

Determinants of Interest Rates on Corporate Bonds of Mining Enterprises

Ranosz

2017

Archives of Mining Sciences

View full text Add to dashboard Cite

This article is devoted to the determinants of interest rates on corporate bonds of mining enterprises. The study includes a comparison between the cost of foreign capital as resulting from the issue of debt instruments in different sectors of the economy in relation to the mining industry. The article also depicts the correlation between the rating scores published by the three largest rating agencies: S&P, Moody`s, and Fitch. The test was based on simple statistical methods. The analysis performed indicated that there is a dependency between the factors listed and the amount of interest rates on corporate bonds of global mining enterprises. Most significant factors include the rating level and the period for which the given series of bonds was issued. Additionally, it is not without significance whether the given bond has additional options. Pursuant to the obtained results, is should be recognized that in order to reduce the interest rate on bonds, mining enterprises should pay particular attention to the rating and attempt to include additional options in issued bonds. Such additional options may comprise, for example, an ability to exchange bonds to shares or raw materials.Keywords: mining corporate bonds, convertible bonds, callable and puttable bonds, bond's coupon Niniejszy artykuł został poświęcony determinantom oprocentowania obligacji korporacyjnych spółek górniczych. Do głównych czynników mających znaczący wpływ na wartość kuponu obligacji zaliczono: okres do wykupu obligacji, poziom ratingu oraz rodzaj obligacji. Każda z wymienionych zmiennych może wpływać na obniżenie oraz na podwyższenie wartości kuponu (oprocentowania) obligacji. Celem niniejszego opracowania jest zbadanie zależności pomiędzy kuponem a wymienionymi determinantami. Opracowanie zawiera również porównanie kosztu kapitału obcego wynikającego z emisji instrumentów dłużnych różnych sektorów gospodarki w stosunku do sektora górniczego. W artykule zbadano również korelację pomiędzy udzielanymi ratingami publikowanymi przez trzy największe agencje ratingowe, do których zaliczono: S&P, Moody`s oraz Fitch. Do przeprowadzenia badania wykorzystano proste metody statystyczne. Przeprowadzona analiza wykazała, iż istnieje zależność pomiędzy wymienionymi czynnikami a wartością oprocentowania obligacji emitowanych przez przedsiębiorstwa górnicze na świecie. 622Należy również stwierdzić, iż do najważniejszych należy zaliczyć poziom ratingu oraz okres na jaki została wyemitowana dana seria obligacji. Nie bez znaczenia jest również to czy dana obligacja posiada opcje dodatkowe. Na podstawie otrzymanych wyników należy stwierdzić, iż przedsiębiorstwa górnicze w celu obniżenia oprocentowania obligacji powinny zwracać szczególną uwagę na rating oraz starać się zwierać opcje dodatkowe w emitowanych przez siebie obligacjach. Taką opcją dodatkową może być na przykład możliwości zamiany obligacji na akcje czy też surowiec.Słowa kluczowe: górnicze obligacje korporacyjne, obligacje zamienne, obligacje callable i puttable, kupon obligacji

show abstract

“…Noting that current regulations do not explicitly adjust for agency differences, the authors argue that a reassessment of the use of ratings and the adequacy of public oversight is overdue. In their follow up paper, Cantor and Packer (1997) noted that regulations incorporate private sector credit ratings to determine investment prohibitions and capital requirements for institutional portfolio investments. These regulations implicitly assume that different agencies have equivalent rating scales, despite the fact that some agencies assign systematically higher ratings than others.…”

Section: Literature Reviewmentioning

confidence: 99%

Credit ratings and the pricing of sovereign debt during the euro crisis

Aizenman¹,

Binici²,

Hutchison³

2013

Oxford Review of Economic Policy

View full text Add to dashboard Cite

This paper identifies the impact of credit rating changes on the sovereign spreads in Europe and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, significant economically, and robust even after controlling for conventional fundamentals. A one unit rise in the average credit rating (in a scale index of 25 ratings) decreases CDS spreads by about 45 basis points, on average. However, the association between credit rating changes and spreads follows a complicated non-linear pattern dependent on the level of the credit rating. Applying a non-linear "spline" regression, we find high sensitivity (large change in spreads for a given change in ratings) at the very low end of credit ratings and then a U shape pattern--ratings at the moderately low end (B-) and very high end of credit levels (above A) are fairly insensitive, while middle ratings are quite sensitive to credit rating changes (with the highest sensitivity at the BB+ level). We also find that European countries had quite similar CDS responses to credit rating changes during the pre-crisis period, but that large differences emerged between the now highlysensitive GIIPS group and other European country groupings (EU and Euro Area excluding GIIPS, and the non-EU area). We also find that contagion from changing the ranking of the GIIPS on other euro countries disappears when own-country credit rating changes are taken into account. In contrast, a decline in the credit rating in the GIIPS area is transmitted as a decline in the CDS spread of Non-Euro EU, which may be deemed as a substitute asset that increases in demand when the perceived risk of GIIPS sovereign debt increases.

show abstract

Differences of opinion and selection bias in the credit rating industry

Cited by 257 publications

References 9 publications

Information effect of entry into credit ratings market: The case of insurers' ratings

Information effect of entry into credit ratings market: The case of insurers' ratings

Determinants of Interest Rates on Corporate Bonds of Mining Enterprises

Credit ratings and the pricing of sovereign debt during the euro crisis

Contact Info

Product

Resources

About