International Evidence on the Effects of a Local Presence by U.S. Credit Rating Agencies

Abstract

Major U.S. credit rating agencies are criticized for failing to understand developments in other economies and thereby impeding capital access by assigning lower ratings. Consistent with this, we find that Moody's and S\&P credit ratings are more favorable after the agencies establish a local presence in the rated issuer's country of domicile. The results appear to be driven by a decrease in negative adjustments applied to model-predicted ratings, indicating that rating analysts become more confident with their quantitative model outputs after a local presence. Positive adjustments also increase, suggesting that analysts become more willing to assign higher than model-predicted ratings. Subsequent evidence suggests that, after the local presence, rating increases are not merely catering to local economies but become more informative as evidenced by their negative association with future credit risk premium and probability of default. Our findings inform the debate on the regulation of credit rating agency markets around the world.