Structural Shifts in Credit Rating Standards

Abstract

I examine the time‐series variation in corporate credit rating standards from 1985 to 2007. A divergent pattern exists between investment‐grade and speculative‐grade rating standards from 1985 to 2002 as investment‐grade standards tighten and speculative‐grade loosen. In 2002, a structural shift occurs toward more stringent ratings. Holding characteristics constant, firms experience a drop of 1.5 notches in ratings due to tightened standards from 2002 to 2007. Credit spread tests suggest that the variation in standards is not completely due to changes in the economic climate. Rating standards affect credit spreads. Loose ratings are associated with higher default rates.

The Mitigating Effect of Bank Financing on Shareholder Value and Firm Policies Following Rating Downgrades

“…(Alp, 2013;Baghai, Servaes, and Tamayo, 2014), we observe a decrease in the proportion of firms rated investment-grade over the years and a corresponding increase in the proportion of firms rated high-yield. Unsurprisingly, the effect is stronger in the aftermath of the 2007-2009 recession period.…”

The Making of the Shareholder Primacy Governance Model: Price Theory, the Law and Economics School, and Corporate Law Retrenchment Advocacy

“…Instead, the inadequate and in some cases misleading grading of assets seems to be endemic within the trade. Alp's (2013) overview of credit rating quality during the 1986-2007 period, up to the brink of the finance industry meltdown of 2008, reveals that "[t]he mean downgradeto-upgrade ratio is 1.48 between 1986 and 2007" (Alp, 2013(Alp, , p. 2444. This means that CRAs overrate financial securities on a systematic basis.…”

How Much is Too Much? Debt Capacity and Financial Flexibility

“…Consistent with Mählmann (2011), untabulated results yield that younger ratings tend to be lower than older ratings. 23 out of 27 year dummies capture significant time-specific heterogeneity, such as the change of the rating agency's standards in assigning ratings (Alp (2013)). The time pattern of the dummies (not reported) does not yield systematic difference of ratings across the business cycle which coincides with the findings of Amato and Furfine (2004).…”

“…We use a so called credit score regression (Altman (1968), de Jong, Verbeek, and Verwijmeren (2011), Alp (2013) which expresses the credit rating of a firm as a function of the its debt ratio and other characteristics. The credit score regression reads:…”