Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions

48 Pages Posted: 25 Apr 2011

See all articles by Eduardo A. Cavallo

Eduardo A. Cavallo

Inter-American Development Bank (IDB) - Research Department

Andrew Powell

Inter-American Development Bank (IDB); Universidad Torcuato Di Tella - School of Business; Harvard University - Center for International Development (CID)

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: November 2008

Abstract

If rating agencies add no new information to markets, their actions are not a public policy concern. But as rating changes may be anticipated, testing whether ratings add value is not straightforward. This paper argues that ratings and spreads are both noisy signals of fundamentals and suggest ratings add value if, controlling for spreads, they help explain other variables. The paper additionally analyzes the different actions (ratings and outlooks) of the three leading agencies for sovereign debt, considering the differing effects of more or less anticipated events. The results are consistent across a wide range of tests. Ratings do matter and hence how the market for ratings functions may be a public policy concern.

Suggested Citation

Cavallo, Eduardo A. and Powell, Andrew P. and Powell, Andrew P. and Rigobon, Roberto, Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions (November 2008). IDB Working Paper No. 546, Available at SSRN: https://ssrn.com/abstract=1820934 or http://dx.doi.org/10.2139/ssrn.1820934

Eduardo A. Cavallo (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Andrew P. Powell

Inter-American Development Bank (IDB) ( email )

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Universidad Torcuato Di Tella - School of Business ( email )

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Harvard University - Center for International Development (CID) ( email )

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Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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United States
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617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

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