Structural Shifts in Credit Rating Standards
74 Pages Posted: 3 Dec 2011
There are 3 versions of this paper
Structural Shifts in Credit Rating Standards
Date Written: December 2, 2011
Abstract
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: Suggested Citation
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