An Empirical Analysis of Changes in the Relative Timeliness of Issuer‐Paid vs. Investor‐Paid Ratings

61 Pages Posted: 23 May 2014 Last revised: 13 Aug 2016

See all articles by Erik Berwart

Erik Berwart

Superintendence of Banks and Financial Institutions of Chile (SBIF); Manchester Business School

Massimo Guidolin

University of Liverpool Management School; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Date Written: August 11, 2016

Abstract

We investigate the lead-lag relationships between issuer-paid and investor-paid credit rating agencies (CRAs), after the regulatory reforms in the U.S. (2002-2006) also including outlooks. Over our sample period, ratings (but not outlooks) issued by issuer-paid agencies were certified by the SEC while investor-paid agencies were not certified at all. First, in the wake of the reforms, we find a weaker lead effect of investor-paid over issuer-paid CRAs: after 2002, causality turned bi-directional. Second, after the overhaul of the rating business, issuer-paid CRAs behave less conservatively when dealing with outlook changes than with rating changes, which is consistent with a more conservative approach to ratings than to outlooks, because of the effects of the SEC’s certification. Third, investor-paid downgrades become associated with more negative, statistically significant abnormal stock returns, than issuer-paid downgrades are. These results support the hypothesis that issuer-paid CRAs improved the timeliness of their ratings because of the recently implemented, tighter regulations. However, differences in abnormal returns imply that investor-paid rating actions still carry superior information. Adding data from the post NRSRO status acquisition by Egan Jones Ratings, the investor-paid agency studied in our paper, does not radically affect our results and confirms that some of the previously observed differences in timeliness and market impact have been fading over time.

Keywords: credit rating agencies, timeliness, issuer‐paid agencies, investor‐paid agencies, NRSRO

JEL Classification: G24, G28

Suggested Citation

Berwart, Erik and Guidolin, Massimo and Milidonis, Andreas, An Empirical Analysis of Changes in the Relative Timeliness of Issuer‐Paid vs. Investor‐Paid Ratings (August 11, 2016). Available at SSRN: https://ssrn.com/abstract=2439492 or http://dx.doi.org/10.2139/ssrn.2439492

Erik Berwart

Superintendence of Banks and Financial Institutions of Chile (SBIF) ( email )

Chile

Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Massimo Guidolin

University of Liverpool Management School ( email )

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti 25
Milan, 20136
Italy

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

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