Are Rating Splits a Useful Proxy for Industry Opacity?

Abstract

In empirical analyses, rating splits (disagreement between rating agencies) are commonly used as a proxy for the opacity of an industry. In this paper, we ask whether this can be justified on theoretical grounds. By explicitly modeling the bond rating process, we show that rating splits may occur if an industry is rather opaque but that they may also occur if an industry is rather transparent. Therefore, we conclude that rating splits are an inappropriate proxy for opacity.

Keywords: Opaque assets, ratings, rating agencies, rating splits

JEL Classification: G20, G24, G30