Information Content of Unsolicited Credit Ratings: Evidence from Japanese Firms*

Abstract

Unsolicited ratings are credit ratings of firms that have not requested rating evaluation and, therefore, do not pay fees. Accordingly, unsolicited ratings are issued solely at the discretion of rating agencies based on public information. Given the controversy surrounding unsolicited ratings raised in some published studies as well as by Japanese firms, we examine whether the market extracts any new information from unsolicited ratings. We find that unsolicited ratings are typically of speculative grade rather than investment grade, they induce significant announcement period abnormal returns for downgrades, and they have greater impact for speculative-grade ratings than investment-grade ratings. Keiretsu affiliation of Japanese firms does not mitigate the negative market reaction to unsolicited rating downgrades. Our results suggest that high-quality firms signal their type through solicited ratings while low-quality firms are revealed through unsolicited ratings.

Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

“…The effect of unsolicited ratings on bond yields noted here is also confirmed by Poon, Lee, and Gup (2009), Byoun and Shin (2011), and Fulghieri, Strobl, and Xia (2010).…”

Solicited Versus Unsolicited Ratings: The Role of Selection

“…This is motivated by the fact that these sectors represent the majority of the unsolicited ratings in my sample. In addition, most of the empirical research on unsolicited ratings has been conducted in the¯nancial sector (Gan 2004, Poon & Firth 2005, Poon et al 2009, Bannier et al 2010, Van Roy 2013, particularly in the Asian market (Poon 2003, Poon & Chan 2010, Byoun & Shin 2012. For the sovereign analysis, I restrict the time dimension to 2011 onwards, as 2011 is the¯rst year for which S&P disclosed the solicitation status of a number of sovereign ratings in Europe and Asia (Standard & Poor's, 2011a,b,c).…”

Credit Rating Anomaly in the Taiwan Stock Market

“…() and Creighton et al . () have examined the announcement effect of rating changes on stock returns using data on UK and Australian markets, while Byoun and Shin () have examined the information content of unsolicited credit ratings in Japan, this paper is still the first to examine the long‐term effects of credit rating and rating changes based on a sample outside the US market.…”