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

Abstract

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

Kraft, Pepa, Do Rating Agencies Cater? Evidence from Rating-Based Contracts (August 15, 2014). Available at SSRN: https://ssrn.com/abstract=1726943 or http://dx.doi.org/10.2139/ssrn.1726943

Pepa Kraft (Contact Author)

HEC Paris ( email )

Jouy-en-Josas
France
644161543 (Phone)

HOME PAGE: http://www.hec.edu/Faculty-Research/Faculty-Directory/KRAFT-Pepa2

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