Structural Shifts in Credit Rating Standards

74 Pages Posted: 3 Dec 2011

Multiple version iconThere are 3 versions of this paper

Date Written: December 2, 2011


I examine the time-series variation in corporate credit-rating standards (i.e., whether the rating agencies become more generous or stringent in rating assignments) from 1985 to 2007. A divergent pattern exists between investment-grade and speculative-grade rating standards from 1985 to 2002 as investment-grade standards tighten and speculative-grade loosen. In 2002, a structural shift occurs towards more stringent ratings. Holding characteristics constant, firms experience a drop of 1.5 notches in ratings due to tightened standards from 2002 to 2007. Credit-spread tests suggest that the variation in standards is not completely due to changes in the economic climate. Changes in standards appear to affect credit-spreads and default rates. Evidence exists to suggest that loose ratings lead to higher default and lower recovery rates.

Keywords: rating, credit rating, rating inflation, rating conservatism, credit rating standard, Dot-Com crash, Sarbanes-Oxley

JEL Classification: G3, G10, G20, L5

Suggested Citation

Alp Paukowits, Aysun, Structural Shifts in Credit Rating Standards (December 2, 2011). Available at SSRN: or

Aysun Alp Paukowits (Contact Author)

University of Maryland ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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