Credit Ratings Quality in Uncertain Times
71 Pages Posted: 16 Nov 2020 Last revised: 7 Mar 2023
Date Written: September 27, 2020
We investigate ratings quality across uncertain and normal times proxied by variations in economic policy uncertainty. We find that increased policy uncertainty is associated with weaker rating standards. This finding is unrelated to variations in macroeconomic conditions and holds when we use an instrumental variable approach. The effect is more pronounced for firms with which rating agencies have more conflicts of interest. We also find that ratings are less informative about firm credit quality in times of heightened policy uncertainty. These findings suggest that increased policy uncertainty distorts ratings quality through a conflicts of interest channel.
Keywords: ratings quality; conflicts of interest; policy uncertainty; regulation
JEL Classification: G18, G24, G28, D83, L15
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