Cross-Listed Bonds, Information Asymmetry and Rating Conservatism

45 Pages Posted: 2 Sep 2010 Last revised: 7 Aug 2015

See all articles by Yigit Atilgan

Yigit Atilgan

Sabanci University

Al (Aloke) Ghosh

UNC Charlotte

Meng Yan

Fordham University - Gabelli School of Business

Jieying Zhang

The University of Texas at Dallas

Date Written: May 12, 2011

Abstract

We investigate whether rating conservatism increases with information asymmetry. We argue that high information asymmetry amplifies debtholders’ reliance on ratings for investment and contracting purposes, thus making rating agencies’ loss function more asymmetric and ratings more conservative. We exploit the greater information asymmetry of cross-listed bonds to test this hypothesis. Consistent with our expectation, we find that cross-listed bonds have lower initial ratings, are less likely to be upgraded, and take longer to be upgraded compared to U.S. domestic bonds with similar characteristics. While these results are consistent with rating conservatism, they are also consistent with rating agencies possessing private information that accurately reflects the higher risk of cross-listed bonds. To differentiate between these two explanations, we rely on three distinct tests and find results consistent with the rating conservatism and inconsistent with the private information explanation.

Keywords: cross-listed bonds, credit ratings, rating conservatism, cost of debt

JEL Classification: M41, G29, G38

Suggested Citation

Atilgan, Yigit and Ghosh, Al (Aloke) and Yan, Meng and Zhang, Jieying, Cross-Listed Bonds, Information Asymmetry and Rating Conservatism (May 12, 2011). Journal of Money, Credit, and Banking, Vol. 47, No. 5, 2015. Available at SSRN: https://ssrn.com/abstract=1670215 or http://dx.doi.org/10.2139/ssrn.1670215

Yigit Atilgan (Contact Author)

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey

Al (Aloke) Ghosh

UNC Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

HOME PAGE: http://www.alokeghosh.com

Meng Yan

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Jieying Zhang

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

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