When Do Differences in Credit Rating Methodologies Matter? Evidence from High Information Uncertainty Borrowers
Posted: 22 Oct 2016
Date Written: October 19, 2016
This study investigates whether and when differences in the credit rating agencies' methodologies result in differences in rating properties. In particular, this study focuses on differences in information processing constraints between a rating agency that utilizes qualitative analysis and direct access to borrowers' management in its rating process (Standard & Poor's) compared to one that does not (Egan Jones Ratings Company) and how these differences affect rating quality. We find that, as information uncertainty about borrowers increases, Egan Jones's rating accuracy, informativeness and timeliness decrease relative to Standard & Poor's. Our findings suggest that Egan Jones's more restricted rating methodology can lead to limitations in information processing and, thus, reductions in Egan Jones's rating quality advantage for borrowers with greater information uncertainty.
Keywords: credit rating agencies, information uncertainty, qualitative vs. quantitative analysis
JEL Classification: G10, G24
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