Structural Shifts in Credit Rating Standards
74 Pages Posted: 13 Sep 2012
Date Written: September 8, 2012
I examine the time-series variation in corporate credit-rating standards 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. Rating standards appear to affect credit-spreads. My evidence suggests that loose ratings lead to higher default rates.
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