Friday, Jan. 6, 2017 3:15 PM – 5:15 PM
- Chair: John Griffin, University of Texas-Austin
Non-Rating Revenue and Conflicts of Interest
AbstractRating agencies produce ratings used by investors, but obtain most of their revenue from issuers, both as ratings fees and as payment for other services. This leads to a potential conflict of interest. We employ a detailed panel data set on the use of non-rating<br />
services as well as payment flows between issuers and rating agencies in India to test if this conflict affects credit ratings. Rating agencies rate securities issued by<br />
companies that also hire them for non-rating services 0.3 notches higher (than agencies that are not paid for such services by the issuer). This effect is increasing in the<br />
revenue generated. We also find that, within rating categories, default rates are higher for firms that have paid for non-rating services. This suggests that the better rating that such firms receive does not reflect lower credit risk.
The Disciplining Effect of Credit Ratings: Evidence From Corporate Asset Sales
AbstractWe provide empirical evidence on the role credit rating agencies play as dedicated monitors. We find that firms are significantly more likely to conduct an asset sale following a credit rating downgrade. Shareholder wealth effects at the announcement of an asset sale and the likelihood of divesting relatively poorly performing assets is significantly higher when an asset sale is preceded by a credit rating downgrade. Our evidence suggests that rating downgrades affect managerial discipline as evidenced by more efficient capital allocation. We find only limited support for the argument that credit rating downgrades exacerbate financial distress.
- G3 - Corporate Finance and Governance