The Use of Credit Ratings in Investment Management in the US and Europe

28 Pages Posted: 27 Jun 2007

See all articles by Richard Cantor

Richard Cantor

Moody's Investors Service

Owain Ap Gwilym

Bangor Business School

Stephen Thomas

University of Southampton - School of Management

Date Written: February 16, 2007

Abstract

We analyse a survey of 200 plan sponsors and investment managers in the US and Europe regarding the use of credit rating guidelines in the conduct of their investment activities. We find that ratings-based guidelines are widespread, but their forms and motivations vary considerably. The usage of ratings appears remarkably similar in the US and Europe. The adoption of ratings-based investment guidelines appears driven by the private sector, with regulation playing a relatively minor role. Guidelines generally reference ratings of specific agencies, rather than the ratings of all officially "recognized" agencies. Ratings-based guidelines seem unlikely to destabilize markets because although asset retention guidelines are common, rapid forced selling upon downgrades is not. Market participants express a preference on the margin for more accuracy over more stability, but stability is valued and guidelines rarely include agency outlook designations, which could be used to increase rating accuracy. These findings generally support the hypothesis presented in Cantor (2004) that ratings are used as governance tools by market participants to ameliorate principal-agent problems between asset managers and their clients.

Keywords: credit ratings, investment management, rating agencies

Suggested Citation

Cantor, Richard Martin and ap Gwilym, Owain and Thomas, Stephen, The Use of Credit Ratings in Investment Management in the US and Europe (February 16, 2007). Available at SSRN: https://ssrn.com/abstract=996133 or http://dx.doi.org/10.2139/ssrn.996133

Richard Martin Cantor (Contact Author)

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Owain Ap Gwilym

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

HOME PAGE: http://www.bangor.ac.uk/business/staff/owain_ap_gwilym.php.en

Stephen Thomas

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

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