The Informational Content of Bond Ratings

Abstract

This paper explores the risk structure of interest rates. The focus is on whether yields on industrial bonds indicate that market participants base their evaluations of a bond issue's default risk on agency ratings or on publicly available financial statistics. Using a non-linear least squares procedure, the yield-to-maturity is related to Moody's rating, Standard and Poor's (S&P) rating, and accounting measures of creditworthiness such as coverage and leverage. Market yields are found to be significantly correlated with both the ratings and a set of readily available financial accounting statistics. These results indicate (1) that market participants base their evaluations of an issue's creditworthiness on more than the agencies' ratings and (2) that the ratings bring some information to the market above and beyond that contained in the set of accounting variables. The paper also asks whether the market views Moody's and Standard and Poor's ratings as equally reliable measures of risk or whether the market attaches more weight to one agency's ratings than the other. Finally, the hypothesis that the market pays more attention to the accounting measures and less to the ratings if the rating has not been reviewed recently is tested.

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

“…2 Ramakrishnan and Thakor (1984), Millon and Thakor (1984), and Boot et al (forthcoming), for example, provide theories that explain intermediaries whose main function is to produce information to be used by investors. Liu and Thakor (1984), Ederington et al (1987), and Hand et al (1992), in turn, provide evidence that rating agencies produce valuable information.…”

The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis

“…Moody's, Standard and Poor's, Fitch) has received increased attention in recent years. 3 The majority of previous empirical studies focus on external credit ratings assigned by the three large agencies on corporate bonds (Horrigan, 1966;Pinches and Mingo, 1973;Kaplan and Urwitz, 1979;Belkaoui, 1983;Ederington et al, 1987;Kim, 1993) and commercial papers Edgar, 1983, 1984;Chandy and Duett, 1990). Considerably less attention has been given to the development of models to explain the ratings assigned to individual firms rather than issues.…”

Credit Ratings in the Presence of Bailout: The Case of Mexican Subnational Government Debt

“…U.S. SNGs rated by Moody's and Fitch have a kappa of 0.61, which suggests that these entities are not as opaque as those in Mexico. Ederington, Yawitz, and Roberts (1987) suggest three reasons for differing bond ratings. First, agencies may agree on the creditworthiness of a bond but apply different standards for a particular rating.…”