The Economic Function of Credit Rating Agencies - What Does the Watchlist Tell Us?

37 Pages Posted: 17 Feb 2009 Last revised: 14 Jan 2010

See all articles by Christian W. Hirsch

Christian W. Hirsch

University of Frankfurt; Leibniz Institute for Financial Research SAFE

Christina E. Bannier

Justus-Liebig-University Giessen

Date Written: July 1, 2009

Abstract

Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract à la Boot et al. (2006), inducing the companies "on watch'' to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.

Keywords: Credit Rating Agencies, Credit Rating, Watchlist, Rating Review, Event Study

JEL Classification: G14, G24, G33

Suggested Citation

Hirsch, Christian W. and Hirsch, Christian W. and Bannier, Christina E., The Economic Function of Credit Rating Agencies - What Does the Watchlist Tell Us? (July 1, 2009). Available at SSRN: https://ssrn.com/abstract=1343421 or http://dx.doi.org/10.2139/ssrn.1343421

Christian W. Hirsch

University of Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
+49 69 798 33704 (Phone)
+49 69 798 33901 (Fax)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Christina E. Bannier (Contact Author)

Justus-Liebig-University Giessen ( email )

Licher Str. 62
Gießen, 35394
Germany
+49 641 99 22551 (Phone)

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