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

48 Pages Posted: 4 Sep 2021

See all articles by Liran Eliner

Liran Eliner

Harvard Business School

Michael Machokoto

University of Northampton

Anywhere (Siko) Sikochi

Harvard University - Business School (HBS)

Date Written: August 9, 2021

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.

Suggested Citation

Eliner, Liran and Machokoto, Michael and Sikochi, Anywhere, International Evidence on the Effects of a Local Presence by U.S. Credit Rating Agencies (August 9, 2021). Available at SSRN: https://ssrn.com/abstract=3901970 or http://dx.doi.org/10.2139/ssrn.3901970

Liran Eliner

Harvard Business School ( email )

Boston, MA 02163
United States

Michael Machokoto

University of Northampton ( email )

Faculty of Art, Science & Technology,
Northampton, NN2 6JD
United Kingdom
1604893484 (Phone)
NN1 5PH (Fax)

Anywhere Sikochi (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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