When Do Differences in Credit Rating Methodologies Matter? Evidence from High Information Uncertainty Borrowers

Posted: 22 Oct 2016

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: October 19, 2016

Abstract

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

Suggested Citation

Bonsall, Samuel B. and Koharki, Kevin and Neamtiu, Monica, When Do Differences in Credit Rating Methodologies Matter? Evidence from High Information Uncertainty Borrowers (October 19, 2016). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2855742

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Kevin Koharki (Contact Author)

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Monica Neamtiu

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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