The Stability and Accuracy of Credit Ratings

38 Pages Posted: 4 Oct 2014

See all articles by Paulo Carvalho

Paulo Carvalho

ISCTE

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics

João Pedro Pereira

Nova School of Business and Economics

Date Written: October 3, 2014

Abstract

This paper investigates the motivations of Credit Rating Agencies (CRAs) to change their ratings, and the consequences of those changes. We propose a new measure of ratings stability that summarizes the information in a ratings transition matrix into a single scalar number. We find that the intensity with which CRAs change ratings varies through time. In particular, rating changes are more intense during economic bad times. Surprisingly, the periods of stronger rating changes are not associated with higher ratings accuracy. Instead, we find that rating changes are more intense in anticipation of higher corporate bond issuance. These results are consistent with CRAs positioning themselves as useful coordinators between firms and investors to facilitate efficient capital allocation.

Keywords: Credit ratings; Stability; Accuracy; Coordination

JEL Classification: G18, G24

Suggested Citation

Carvalho, Paulo and Laux, Paul A. and Pereira, João Pedro S.S., The Stability and Accuracy of Credit Ratings (October 3, 2014). Available at SSRN: https://ssrn.com/abstract=2504972 or http://dx.doi.org/10.2139/ssrn.2504972

Paulo Carvalho

ISCTE ( email )

Av. das Forças Armadas
Lisboa, 1649-026
Portugal

HOME PAGE: http://www.iscte-iul.pt

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics ( email )

Office 306 Purnell Hall
Newark, DE 19716
United States
302-831-6598 (Phone)
302-831-3061 (Fax)

João Pedro S.S. Pereira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

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