Do Rating Agencies Cater? Evidence from Rating-Based Contracts
45 Pages Posted: 18 Dec 2010 Last revised: 29 Sep 2014
Date Written: August 15, 2014
I examine whether rating agencies cater to borrowers with rating-based performance-priced loan contracts (PPrating firms). I use data from Moody's Financial Metrics on its quantitative adjustments for off-balance-sheet debt and qualitative adjustments for soft factors. In the cross-section and for borrowers experiencing adverse economic shocks, I find that these adjustments are more favorable for PPrating firms than for other firms, consistent with rating agencies catering to the PPrating borrowers. I find that this catering is muted in two circumstances when rating agencies' reputational costs are higher than usual: (1) near the investment grade and prime short-term rating thresholds and (2) when Fitch Ratings also provides a rating.
Keywords: Rating agency, off-balance-sheet finance, hard and soft information, debt contracting
JEL Classification: G24, M41
Suggested Citation: Suggested Citation