Do Solicitations Matter in Bank Credit Ratings? Results from a Study of 72 Countries

Abstract

Would the credit ratings of unsolicited banks be higher if they were solicited? Alternatively, would the credit ratings of solicited banks would be lower if they were unsolicited? To answer these questions, we use an endogenous regime-switching model and data from 460 commercial banks in 72 countries, excluding the United States, for the period 1998-2003. The answer to both questions is yes. Our results show that the observed differences between solicited and unsolicited ratings can be explained by both the solicitation status and financial profile of the banks. This finding is a new contribution to the literature. Copyright (c) 2009 The Ohio State University.

Rating opaque borrowers: why are unsolicited ratings lower?*

“…Our results provide tentative, but not conclusive, evidence that the downward bias is, indeed, more pronounced when bank opaqueness is high. Both results are novel and nicely complement the results by Poon et al (2009). Finally, in contrast to most of the earlier studies, our dataset is very clear and uncontaminated because we employ S&P rating data for non-U.S. firms, where the rating status is directly observable and verifiable.…”

“…ratings are downward biased for Asian and international banks, respectively. Most recently, using an endogenous regime-switching model for a sample of non-U.S. banks with S&P ratings between 1998 and 2003, Poon et al (2009) show that unsolicited bank ratings would be higher if they were solicited and, vice versa, that solicited bank ratings would be lower if they were unsolicited. By decomposing the observed rating level differences into two components -the clientele effect, caused by a bank's financial profile, and the treatment effect, due to the solicitation status -they address a potential self-selection bias, but conclude that, at times, the solicitation-status effect may outweigh it.…”

Solicited and Unsolicited Credit Ratings: A Global Perspective

“…In particular, relative size helps determine market position, extent of diversification, and financial flexibility (S&P 2008). Poon and Firth (2005) and Poon, Lee, and Gup (2009) found that larger banks have more incentive to seek credit ratings and that they tend to have higher bank ratings. Because rating agencies consider sovereign credit risk to be important in assessing the credit standing of banks and corporations (S&P 1997, 1998b), S&P's sovereign credit rating (SOV) is included in the rating determinant models to explain LTRs.…”

“…These growing concerns and controversies might have been triggered by the observation that unsolicited credit ratings, on average, tend to be lower than the solicited ratings (see, for example, Poon 2003;Gan 2004;Shimoda and Kawai 2007;Fairchild, Flaherty, and Shin 2009;and Poon, Lee, and Gup 2009). Some researchers asked whether unsolicited ratings were lower than they deserved.…”

“…However, Gan (2004) believed that these rating agencies gave lower ratings to unsolicited issuers not as blackmail or punishment, but as a necessary adjustment for the difference in the true and unobserved quality, such as for private information. Poon and Firth (2005) Using a comprehensive sample of the issuer ratings of 460 commercial banks in 72 countries from S&P for the period 1998-2003, and adopting an endogenous regimeswitching model, Poon, Lee, and Gup (2009) investigated whether solicitation mattered in bank credit ratings. They found that solicited ratings tended to be higher than unsolicited ratings.…”