The Effectiveness of Credit Rating Agency Monitoring: Evidence from Asset Securitizations

Posted: 10 Jan 2015

See all articles by Samuel B. Bonsall

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Kevin Koharki

Purdue University

Monica Neamtiu

City University of New York - Stan Ross Department of Accountancy

Date Written: January 8, 2015

Abstract

This study investigates how differences between the rating agencies’ initial (at the date of debt issuance) and subsequent (post-issuance) monitoring incentives affect securitizing banks’ rating accuracy. We hypothesize that the agencies have stronger incentives to monitor issuers when providing initial versus post-issuance ratings. We document that initial ratings are positively associated with off-balance sheet securitized assets and incrementally associated with on-balance sheet retained securities. However, subsequent ratings fail to capture current exposure to off-balance sheet securitizations. We also find that subsequent ratings reflect default risk less accurately than initial ratings. The subsequent ratings’ responsiveness to default risk is worse when a bank has more off-balance sheet securitized assets. Collectively, our findings are consistent with lax post-issuance monitoring. They raise questions about the effectiveness of using ratings as an ongoing contracting mechanism and suggest that conclusions about rating accuracy could differ depending on whether researchers focus on initial versus post-issuance ratings.

Keywords: credit rating agencies, rating monitoring, off-balance sheet credit risk, asset securitizations

JEL Classification: G21, M40, M41

Suggested Citation

Bonsall, Samuel B. and Koharki, Kevin and Neamtiu, Monica, The Effectiveness of Credit Rating Agency Monitoring: Evidence from Asset Securitizations (January 8, 2015). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2546837

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Kevin Koharki

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Monica Neamtiu (Contact Author)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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