Differential properties in the ratings of certified versus non-certified bond-rating agencies

Beaver, William H.; Shakespeare, Catherine; Soliman, Mark T.

doi:10.1016/j.jacceco.2006.06.002

Cited by 261 publications

(125 citation statements)

References 42 publications

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“…These CRAs hold a substantial fraction of the market but have recently come under intense scrutiny (SEC, 2003(SEC, , 2008Beaver, Shakespeare and Soliman, 2006;Cheng and Neamtiu, 2009). While all three CRAs publish letter ratings, those of S&P and Fitch differ from the letter grades of Moody's.…”

Section: Sovereign Ratings Outlooks and Watchlist Inclusionsmentioning

confidence: 99%

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The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

Michaelides

Milidonis

Nishiotis

et al. 2015

Journal of Financial Economics

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a b s t r a c tRating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and they persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage and, thus, should be a policy concern for capital market regulators.

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Section: Sovereign Ratings Outlooks and Watchlist Inclusionsmentioning

confidence: 99%

“…While all three CRAs publish letter ratings, those of S&P and Fitch differ from the letter grades of Moody's. Following prior bond rating literature (e.g., Beaver, Shakespeare and Soliman, 2006), we transform letter grades of S&P and Fitch (Moody's) as follows:…”

Section: Sovereign Ratings Outlooks and Watchlist Inclusionsmentioning

confidence: 99%

The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

Michaelides

Milidonis

Nishiotis

et al. 2015

Journal of Financial Economics

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“…In Table 3, the correlation matrix indicates that bond rating is significantly correlated with most of firm-and bond-level control variables. The credit rating literature explains this phenomenon with the fact that credit rating agencies take into consideration the issuer's financial information and bond features during the rating process (Beaver et al 2006). Theoretically, cost of debt is a function of default risk.…”

Section: Measurement Of Conditional Conservatismmentioning

confidence: 99%

Conditional conservatism and the yield spread of corporate bond issues

Liu

Magnan

2014

Rev Quant Finan Acc

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Building upon recent research which indicates that debt markets rather than equity markets shape financial reporting, this study examines how conditionally conservative financial reporting relates to the yield spread of corporate bond issues. Our findings suggest that the debt contract efficiency/information costs view of conditional conservatism, documented in private debt contracts, does not generalize to public debt contracts. Instead, a debt contract renegotiation costs perspective seems to better capture the dynamics of the public debt markets, with conditionally conservative reporting being associated with higher yield spread of corporate bond issues. Additional subsample test results indicate that the association between conditional conservatism and bond yield spreads is more pronounced in non-investment grade bonds, for bond issuers with more financial distress, and for bonds that are issued before the passage of the Sarbanes-Oxley Act. This study fills a gap in the conservatism literature, which focuses primarily on equity or private bank loan markets with traditional debt contract efficiency/information costs view.

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“…If varying economic attributes of leases affect credit risk differently, ratings that do not reflect such differences would be less useful to banks. Moreover, there is evidence that certified rating agencies are not timely with rating changes (Beaver et al 2006), which may undermine a rating's usefulness. The above discussion leads to our second hypothesis, stated in the alternative form: Consequently, the effect of leases on credit assessments, especially the assessment of loss given default, should reflect such differences.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

Operating Leases and Credit Assessments

Altamuro

Johnston²,

Pandit

et al. 2012

SSRN Journal

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Operating leases have grown significantly as a source of corporate financing over the last 30 years. Their offbalance sheet treatment, which may in part explain their popularity, raises concern that financial risk may be misjudged and capital misallocated. Prior research evidence on the above issue is mixed. To improve reporting transparency, regulators propose a new accounting concept, right of use, which will add the present value of most leases to the balance sheet. We examine the effect of operating leases on loan pricing by banks, a sophisticated financial statement user. Since leases are a potential debt substitute, we expect them to be important in our setting. With loan spreads as the dependent variable, we test the differential explanatory power and model fit of as-reported financial ratios versus financial ratios adjusted for the capitalization of operating leases. We find that lease-adjusted financial ratios better explain loan spreads, especially for larger lenders. Our results also suggest that retailer leases that are closer in substance to rental agreements than financed asset purchases are less relevant for credit risk assessments. Thus we conclude that banks not only price operating leases, on average, but also make distinctions about which leases should be priced. Second, we explore the role of credit rating agencies and confirm that credit ratings also reflect capitalized operating leases, and find support for an informational role for others' credit assessments. However, unlike banks, rating agencies appear to capitalize all operating leases mechanically. Overall, our results suggest that banks and rating agencies adjust for the off-balance sheet presentation of operating leases and, at least in the case of banks, attempt to do so to reflect the underlying economics of the leases. This evidence lessens concern over the potential negative consequences of existing operating lease accounting and raises concern over proposed accounting that capitalizes all leases regardless of their economic characteristics. Electronic copy available at: http://ssrn.com/abstract=1115924 1 AbstractOperating leases have grown significantly as a source of corporate financing over the last 30 years. Their off-balance sheet treatment, which may in part explain their popularity, raises concern that financial risk may be misjudged and capital misallocated. Prior research evidence on the above issue is mixed. To improve reporting transparency, regulators propose a new accounting concept, right of use, which will add the present value of most leases to the balance sheet. We examine the effect of operating leases on loan pricing by banks, a sophisticated financial statement user. Since leases are a potential debt substitute, we expect them to be important in our setting. With loan spreads as the dependent variable, we test the differential explanatory power and model fit of as-reported financial ratios versus financial ratios adjusted for the capitalization of operating leases. We find that lease-adjusted financial...

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Differential properties in the ratings of certified versus non-certified bond-rating agencies

Cited by 261 publications

References 42 publications

The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

Conditional conservatism and the yield spread of corporate bond issues

Operating Leases and Credit Assessments

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