Do Rating Agencies Cater? Evidence from Rating-Based Contracts
New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Accounting, Taxation & Business Law
July 8, 2011
I examine whether rating agencies are more likely to cater to borrowers with rating-based performance pricing agreements (PPrating firms). This study uses data from Moody's Financial Metrics on agency adjustments to investigate this prediction and exploits an unexpected adverse shock to firms' credit risk as identification. The evidence is mixed. In the cross-section and for firms experiencing adverse shocks, agency adjustments are more favorable for PPrating firms. However, agency adjustments are less favorable when the agency's reputational costs are high. Agency adjustments for PPrating firms are not associated with incrementally higher bond yields.
Number of Pages in PDF File: 47
Keywords: Rating agency, off-balance-sheet finance, hard and soft information, debt contracting
JEL Classification: G24, M41working papers series
Date posted: December 18, 2010 ; Last revised: July 9, 2011
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