Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

49 Pages Posted: 21 Sep 2010

See all articles by Seung Hun Han

Seung Hun Han

Korea Advanced Institute of Science and Technology (KAIST) - Department of Management Science

Michael S. Pagano

Villanova University - Villanova School of Business

Yoon S. Shin

Loyola University Maryland

Date Written: September 20, 2010

Abstract

It has been a puzzle why foreign firms obtain credit ratings by global rating agencies such as S&P or Moody’s rather than from their home country’s rating agencies even though the global raters typically assign lower credit ratings when these foreign firms issue bonds in their home currencies. In addition, unlike firms in the U.S., foreign firms are not required to obtain ratings from the SEC-sanctioned Nationally Recognized Statistical Rating Agencies (NRSROs). We investigate this puzzle with new 3,525 yen-denominated plain vanilla bonds issued in Japan during 1998-2009 and find that bonds rated by at least one global agency can, on average, result in yields that are 11-14 bps lower than those rated by only Japanese rating agencies. However, during the 2007-2009 financial crisis, Japanese issuers which used S&P and Moody’s actually faced yields that were 14-19 bps higher, thus negating the prior advantage of obtaining a bond rating from a global rating firm, after controlling for other factors. This suggests that the credibility and reputation of the global rating agencies such as S&P and Moody’s have declined following public disclosure of these firms’ problems associated with the subprime mortgage securitization process. In addition to the greater size and longer maturity of the bond issue, we find that Japanese firms with more financial leverage, greater information asymmetry, higher levels of equity ownership by foreigners, poor financial performance, and greater systematic risk are more likely to seek ratings from Moody’s or S&P rather than Japanese rating agencies.

Keywords: Credit ratings, Cost of debt, Financial crisis, Reputation

JEL Classification: G10, G14, G15

Suggested Citation

Han, Seung Hun and Pagano, Michael S. and Shin, Yoon S., Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt (September 20, 2010). Available at SSRN: https://ssrn.com/abstract=1680084 or http://dx.doi.org/10.2139/ssrn.1680084

Seung Hun Han

Korea Advanced Institute of Science and Technology (KAIST) - Department of Management Science ( email )

291 Daehak-ro(373-1 Guseong-dong), Yuseong-gu
Daejeon, 305-701
Korea, Republic of (South Korea)

Michael S. Pagano (Contact Author)

Villanova University - Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
(610) 519-4389 (Phone)

HOME PAGE: http://www90.homepage.villanova.edu/michael.pagano

Yoon S. Shin

Loyola University Maryland ( email )

Department of Finance
Baltimore, MD 21210
United States

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