Split Ratings and Bond Reoffering Yields

Billingsley, Randall S.; Lamy, Robert E.; Marr, M. Wayne; Thompson, G. Rodney

doi:10.2307/3665158

Cited by 47 publications

(47 citation statements)

References 3 publications

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“…Billingsley et al (1985) and Perry et al (1988) reveal that the inferior rating determines bond yield or investors lean toward the more conservative CRA risk assessments. Therefore, split-rated bonds could be more expensive for debt issuers than equally-rated bonds.…”

Section: Literature Reviewmentioning

confidence: 99%

The credit signals that matter most for sovereign bond spreads with split rating

Alsakka

Gwilym

2015

Journal of International Money and Finance

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We investigate how split ratings influence the information content of credit rating events on the sovereign bond markets during 2000-2012. We find that market reactions are far stronger for negative events on the inferior ratings and for positive events on the superior ratings. Such evidence suggests aversion of market participants to the ambiguity inherent in split ratings.Sovereign credit spreads are particularly responsive to negative events by S&P (the more conservative agency in the sample). Moody's positive events have a significant impact only when Moody's assigns superior pre-event ratings compared with S&P. There is little evidence that split ratings involving Fitch have any market implication. JEL classification: G15; G24Keywords: Sovereign credit event; Ambiguity aversion; Split ratings; Bond spreads. * Corresponding author. Tel.: +44 (0) 1248 383571. E-mail address: r.alsakka@bangor.ac.uk. AcknowledgementsWe are indebted to an anonymous referee for their suggestions. We are very grateful for comments from Robert Faff, Ian Tonks, and seminar participants at the University of Bath, UK.1

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Section: Literature Reviewmentioning

confidence: 99%

The credit signals that matter most for sovereign bond spreads with split rating

Alsakka

Gwilym

2015

Journal of International Money and Finance

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“…We include these controls to account for the possibility that rating splits result from potential differences in the information available on the issuers and the familiarization of rating agencies with them. Finally, we include a time trend to control for factors such as learning, and the number of 4 See Jewell and Livingston (1998), Billingsley et al (1985), and Liu and Moore (1987); Kish et al (1999) and Cantor et al (1997), respectively. 5 In our model there is no difference between the rating of an issuer and the rating of its bonds.…”

Section: Determinants Of the ''Quality'' Of Rating Agencies' Signalmentioning

confidence: 99%

Why firm access to the bond market differs over the business cycle: A theory and some evidence

Santos¹

2006

Journal of Banking & Finance

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“…This implies that firms would have an incentive to seek additional ratings (beyond the first) if they believed that an error in judgement caused them to receive an inaccurately low rating, or conversely that an error in judgement could cause them to receive an inaccurately high rating from the next rater. Billingsley, Lamy, Marr, and Thompson (1985) , henceforth BLMT, attempted to empirically test whether or not the market prices split ratings as if they are caused by random differences in judgement. The authors examined a sample of 258 industrial nonshelf bonds rated Ba and above, 33 of which received split ratings, issued between January 1977 and June 1983.…”

Section: Literature On Split Ratings and Their Impact On Bond Yieldsmentioning

confidence: 99%

A Comparison of Bond Ratings from Moody's S&P and Fitch IBCA

Jewell¹,

Livingston

1999

Financial Market

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Previous research has found that the bond market values the ratings of Moody's and Standard & Poor's. This paper extends earlier research by comparing the ratings of Moody's, Standard and Poor's, and Fitch IBCA. The authors examine a very large database with monthly observations of bonds and bond ratings over a five-year time period. The analysis focuses on comparing rating levels, rating changes, and the impact of ratings on bond yields. The results show that firms with publicly available Fitch IBCA ratings have higher ratings from Moody's and S&P than firms without Fitch IBCA ratings. The typical firm releasing a Fitch IBCA rating has a lower yield (controlling for Moody's and S&P rating), a more stable rating, and is more likely to receive an upgrade. For split-rated bonds (Moody's vs. S&P), Fitch IBCA serves as a tiebreaker. This evidence is consistent with the bond market valuing the ratings of all three raters-Moody's, Standard & Poor's, and Fitch IBCA. OVERVIEWBond ratings have long been considered important by government regulators, firms, and bond investors as an indicator of the credit risk of an issuer. In the academic literature, the consensus is growing that bond ratings convey useful information to the market.1 However, studies of bond ratings have been largely confined to the two largest raters-Moody's and Standard & Poor's (S&P).2 To some extent this limitation in the literature is logical since Moody's and S&P are the clear leaders in the credit rating industry. However, many firms are rated not only by the two large raters, but also by one or more smaller rating agencies such as Fitch IBCA or Duff and Phelps. The purpose of this paper is to compare the ratings of one of the smaller rating agencies, Fitch IBCA, to those of Moody's and S&P. By doing this we hope to see whether the market values Fitch IBCA ratings as well as those of Moody's and S&P.Moody's and Standard & Poor's follow a policy of rating most SEC registered, U.S. corporate debt issues. Thus, almost all large public bond issues have at least two ratings. This is true whether or not the issuing firm chooses to pay the rating agency for the rating. However, Fitch IBCA and Duff & Phelps, the other two "full service" credit rating agencies, provide ratings only when requested and paid. Thus, an issuing firm must actively seek out these costly ratings in order to obtain them. In addition, both Fitch IBCA and Duff and Phelps allow issuing firms to stop the release of a rating before it becomes public if the firm is not satisfied for some reason.1 Hand, Holthausen, and Leftwich (1992) and Jewell and Livingston (1998) among many others. 2 There are recent studies by Cantor and Packer (1995, 1996a Jeff Jewell and Miles LivingstonThere are several possible views of the potential benefits of seeking out additional ratings. First, an additional rating may not convey any incremental information beyond the Moody's and S&P ratings. According to this view, Moody's and S&P have all the necessary information to determine ratings and to properly ev...

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Split Ratings and Bond Reoffering Yields

Cited by 47 publications

References 3 publications

The credit signals that matter most for sovereign bond spreads with split rating

The credit signals that matter most for sovereign bond spreads with split rating

Why firm access to the bond market differs over the business cycle: A theory and some evidence

A Comparison of Bond Ratings from Moody's S&P and Fitch IBCA

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