Globalizing Ratings: Effects of Global Credit Rating Agencies’ Local Presence on Rating Outcomes

48 Pages Posted: 4 Sep 2021 Last revised: 4 Nov 2022

See all articles by Liran Eliner

Liran Eliner

Harvard University - Business School (HBS)

Le Ma

University of Technology Sydney (UTS)

Michael Machokoto

University of the Witwatersrand

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 Ma, Le and Machokoto, Michael and Sikochi, Anywhere, Globalizing Ratings: Effects of Global Credit Rating Agencies’ Local Presence on Rating Outcomes (August 9, 2021). Available at SSRN: https://ssrn.com/abstract=3901970 or http://dx.doi.org/10.2139/ssrn.3901970

Liran Eliner

Harvard University - Business School (HBS) ( email )

Boston, MA 02163
United States

Le Ma

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Michael Machokoto

University of the Witwatersrand ( email )

School of Economics and Finance
1 Jan Smuts Ave, Braamfontein
Johannesburg, Gauteng 2000
South Africa

Anywhere Sikochi (Contact Author)

Harvard University - Business School (HBS) ( email )

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

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