Do Limits on Institutional Investment Increase Opportunities For Ratings Shopping at the Margin of Investment and Speculative Grade?

16 Pages Posted: 22 Sep 2017

See all articles by Joseph Kerstein

Joseph Kerstein

Yeshiva University - Syms School of Business

Sungsoo Kim

Rutgers Business School - Camden; University of Minnesota Duluth

Murugappa (Murgie) Krishnan

Yeshiva University

Date Written: September 21, 2017

Abstract

Rating agencies are expected to be concerned about their long-term reputation because if they lose the trust of investors their ratings would lose credibility and value. We expect that there is less effective monitoring and hence more opportunities for ratings shopping within speculative grades because pensions and other similar institutions known for effective monitoring are limited by regulatory and/or contractual constraints from purchasing those instruments. Utilizing annual data on US firms rated by Standard and Poor’s, we find systematically better ratings outcomes in speculative than investment grades firms at the margin of investment and speculative grades, ceteris paribus, consistent with opportunistic behavior.

Suggested Citation

Kerstein, Joseph J. and Kim, Sungsoo and Krishnan, Murugappa (Murgie), Do Limits on Institutional Investment Increase Opportunities For Ratings Shopping at the Margin of Investment and Speculative Grade? (September 21, 2017). Available at SSRN: https://ssrn.com/abstract=3040464 or http://dx.doi.org/10.2139/ssrn.3040464

Joseph J. Kerstein

Yeshiva University - Syms School of Business ( email )

United States

Sungsoo Kim (Contact Author)

Rutgers Business School - Camden ( email )

227 Penn Street
Camden, NJ 08102
United States
856-225-6584 (Phone)

University of Minnesota Duluth ( email )

10 University Avenue
Duluth, MN 55812
United States

Murugappa (Murgie) Krishnan

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States

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