Do Investors Care About Credit Ratings? An Analysis Through the Cycle

Iannotta, Giuliano; Nocera, Giacomo; Resti, Andrea

doi:10.2139/ssrn.1945312

Cited by 14 publications

(15 citation statements)

References 23 publications

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“…Following Sironi (2003), we collect data regarding the coupon offered by fixed-rate bonds, the frequency of coupon payment, the size of the issuance, the maturity, and the listing venue, if any. Consistent with previous literature (e.g., Gabbi & Sironi, 2005;Iannotta, 2011;Iannotta, Nocera, & Resti, 2013a;Sironi, 2003), we exclude perpetual bonds, while we include bonds denominated in euro, with no optional component (e.g., call or put option). Overall, this selection procedure leads us to a unique dataset of 1,798 bonds issued by a sample of 28 Italian banks during the period January 2013-December 2016.…”

Section: Data and Empirical Methodologymentioning

confidence: 99%

“…where BOND VAR is a vector of bond characteristics, which includes the following variables: Maturity = the time to maturity, in years, measured at the issuing date (as in Iannotta et al, 2013a); Size = the log of the amount issued (as in Iannotta & Navone, 2008); Listed = a dummy equal to one if the bond is listed on a regulated stock exchange or MTF;…”

Section: Data and Empirical Methodologymentioning

confidence: 99%

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Bail‐in rules and the pricing of Italian bank bonds

Crespi

Giacomini

Mascia

2019

Euro Fin Management

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We analyze whether the introduction of the bail‐in tool in January 2016 affected the pricing of Italian bank bonds. Using a unique dataset of 1,798 fixed‐rate bonds issued during the period 2013–2016, we find an increase of the spread at issuance of bail‐inable bonds compared to non‐bail‐inable bonds. This increase also depends on the intrinsic characteristics of each bank. Large institutions, banks with lower ratings, profitability, capitalization, and higher liquidity faced a higher cost of issuing bail‐inable bonds. Overall, our results seem to support the hypothesis of an improved market discipline for the bank bond primary market.

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Section: Data and Empirical Methodologymentioning

confidence: 99%

Section: Data and Empirical Methodologymentioning

confidence: 99%

Bail‐in rules and the pricing of Italian bank bonds

Crespi

Giacomini

Mascia

2019

Euro Fin Management

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“…Weinstein (1977), however, concludes that bond returns are not related to rating changes in a period of up to 6 months after the announcements. Later, other authors have identified links between rating announcements and issuance spread (e.g., Iannotta, Nocera, & Resti, 2013) and return (e.g., Abad & Robles, 2015;Liu & Thakor, 1984;Stover, 1991).…”

Section: Credit Ratings and Financial Instruments' Performancementioning

confidence: 99%

Do credit ratings affect spread and return? A study of structured finance products

Moreira

Zhao

2018

Int. J Fin Econ

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Although the previous studies investigating the relationship between credit ratings and spread or return in the financial market are normally restricted to noncausal measures, this paper uses structural equation modelling to test the possibility of causal links from ratings to spread and return in the context of structured finance products. Our analyses are split into 2 stages: First, we search for causality between ratings and spread at the issuance stage (primary market) based on a sample comprising all tranches of asset‐backed securities issued in the United States by American and foreign institutions from December 1999 to December 2015. Then, we consider all ABS rating changes from February 2001 to December 2015 to check whether the assumption of causal connection between ratings and return at the trading stage (secondary market) is reasonable. After testing all pertinent combinations among the variables in our database, we find evidence of causality at the issuance stage but very little support to causality at the trading stage. This study contributes to the debate on the regulation of credit rating agencies as our findings suggest that ratings may have an effective influence on decisions made by investors at the time structure finance products are issued. As this effect is very weak when those assets are traded in the secondary market, in principle, regulators should focus their attention on the credit rating agencies' activities regarding the issuance of new structured products.

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“…Mistrust makes it difficult for investors to determine the creditworthiness of an instrument or issuer. In a recent study, Iannotta () found that ‘ investors’ trust in rating agencies today is limited to top‐rated bonds, while for worse issues investors' reliance on ratings decreases '. According to Iannotta (), ‘The forecasting ability of rating agencies declines when credit markets become tighter and experience “flight to quality” phenomena.…”

Section: Rating Agencies Backgroundmentioning

confidence: 99%

“…In a recent study, Iannotta () found that ‘ investors’ trust in rating agencies today is limited to top‐rated bonds, while for worse issues investors' reliance on ratings decreases '. According to Iannotta (), ‘The forecasting ability of rating agencies declines when credit markets become tighter and experience “flight to quality” phenomena. Investors appear (to be) aware of this cyclicality in rating agencies’ performances and take it into account when pricing new bond issues on the primary market '.…”

Section: Rating Agencies Backgroundmentioning

confidence: 99%

Assessing Rating Agencies' Ability to Predict Bank Bankruptcy – The Lace Financial Case

Santoni

Arbia

2013

Economic Notes

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This paper responds to renewed interest in the following controversial question: do rating agencies have the ability to predict the risk of bank bankruptcy in a timely manner, and are they able to communicate it on time to the banking system? We tried to provide an answer to this question by checking when US banks that failed in 2009 were downgraded to Non‐Investment Grade (E). The database for this analysis consists of 116 US banks failing in 2009. The rating agency considered is Lace Financial Corporation. The study analyses the time series of ratings for the sample banks from the fourth quarter of 2005 to the date of bankruptcy and shows that over 72 per cent of the US banks that failed in 2009 had been downgraded to E in the fourth quarter prior to failure and 94 per cent had been rated E six months prior to bankruptcy. Empirical evidence from the Lace case does support the view that the Credit Rating Agency provides timely information to market participants.

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Do Investors Care About Credit Ratings? An Analysis Through the Cycle

Cited by 14 publications

References 23 publications

Bail‐in rules and the pricing of Italian bank bonds

Bail‐in rules and the pricing of Italian bank bonds

Do credit ratings affect spread and return? A study of structured finance products

Assessing Rating Agencies' Ability to Predict Bank Bankruptcy – The Lace Financial Case

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