The Financial Crisis and Corporate Credit Ratings

54 Pages Posted: 10 Nov 2016 Last revised: 13 May 2017

See all articles by Ed deHaan

Ed deHaan

University of Washington - Michael G. Foster School of Business

Date Written: September 10, 2016

Abstract

Credit ratings on many financial instruments failed to accurately portray default risk before the global financial crisis. I find no decline in the performance of corporate credit ratings during or after the crisis, indicating that the failures of ratings on financial instruments were due to conditions unique to the rating agencies’ financial instruments divisions. Rather, the preponderance of tests indicate that corporate credit rating performance improves after the crisis, consistent with the rating agencies positively responding to public criticism and regulatory pressures. At the same time, I find evidence of sophisticated market participants decreasing their reliance on corporate credit ratings after the crisis. Consistent with theoretical models of reputation cyclicality, a likely explanation is that the rating agencies suffer spillover reputation damage from their failed ratings on financial instruments. My study informs regulators, practitioners, and academics about the performance of corporate credit ratings during and after the crisis, and provides novel empirical evidence consistent with reputation concerns affecting credit rating usage decisions.

An Internet Appendix with supplementary materials is available at the following URL: http://ssrn.com/abstract=2908178

Keywords: credit ratings; financial crisis; rating reputation; rating performance; debt contracting

Suggested Citation

deHaan, Ed, The Financial Crisis and Corporate Credit Ratings (September 10, 2016). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2837376

Ed DeHaan (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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