Rating Shopping and Rating Inflation in Israel

41 Pages Posted: 2 Aug 2011 Last revised: 13 Mar 2014

See all articles by Inna Baklayar

Inna Baklayar

Ben-Gurion University of the Negev - Department of Economics

Koresh Galil

Ben-Gurion University of the Negev - Department of Economics

Date Written: February 15, 2014

Abstract

Firms may exploit the option of choosing among different rating agencies in order to pick the highest rating offered. This possibility, known as rating shopping, is relatively limited on the US corporate bond market because the two main rating agencies (S&P and Moody’s) rate virtually all large bond issuers. In this study, we use data on corporate bond ratings assigned by two Israeli rating agencies affiliated with S&P and Moody’s during the period 2004-2012. We show that while one agency (Midroog) systematically assigned higher ratings, the ratings of the other agency (S&P-Maalot) were inflated due to rating shopping. However, despite the many features that encourage rating inflation, the resulting distortion was relatively small (one notch). This may be a fair price for maintaining a competitive rating industry.

Keywords: Corporate bonds; Credit ratings; Rating agencies; Rating shopping; Rating inflation

JEL Classification: G01, G24, G28, G33

Suggested Citation

Baklayar, Inna and Galil, Koresh, Rating Shopping and Rating Inflation in Israel (February 15, 2014). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1903827 or http://dx.doi.org/10.2139/ssrn.1903827

Inna Baklayar

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel

Koresh Galil (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+972-8-6472310 (Phone)

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