Is There a Difference Between Solicited and Unsolicited Bank Ratings and, If So, Why?

Abstract

This paper analyses the effect of soliciting a rating on the rating outcome of banks. Using a sample of Asian banks rated by Fitch Ratings ("Fitch"), I find evidence that unsolicited ratings tend to be lower than solicited ones, after accounting for differences in observed bank characteristics. This downward bias does not seem to be explained by the fact that better-quality banks self-select into the solicited group. Rather, unsolicited ratings appear to be lower because they are based on public information. As a result, they tend to be more conservative than solicited ratings, which incorporate both public and non-public information.JEL-code : G15, G18, G21

The Economics of Solicited and Unsolicited Credit Ratings

“…Several empirical papers have shown that unsolicited ratings are significantly lower than solicited ratings (e.g., Poon, 2003;Gan, 2004;Poon and Firth, 2005;Van Roy, 2006;Bannier, Behr, and Güttler, 2010). 23 However, the reason for this difference is not well understood.…”

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

“…Using the unsolicited ratings of Standard and Poor’s (S&P’s), Poon (2003) shows that unsolicited ratings are lower than solicited ratings. Firth and Poon (2005) and Van Roy (2006) also reveal that the unsolicited ratings of Fitch are lower than its solicited ratings. Focusing on the operations of six major rating agencies, including Moody’s and S&P’s, the Japan Center for International Finance (JCIF, 1999) asserts that the rating agencies often issue unsolicited ratings of companies and approach the companies to persuade them to seek solicited ratings by paying a fee.…”

“…Our findings are comparable to previous studies. For example, Shimoda and Kawai (2007) quantify the difference between solicited and unsolicited ratings for Japanese issuers, whereas Van Roy (2006) shows that the difference between solicited and unsolicited ratings of Asian issuers disappears once the release of public information is accounted for, suggesting that rating agencies issue unsolicited ratings based on public information. Our results further suggest that market reactions do not differentiate between solicited and unsolicited ratings.…”

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).…”

“…Similarly, Bannier et al (2010) nd lower ex-post default rates for the group of S&P unsolicited non-US banks between 1996 and 2006 and argue that this result suggests unsolicited bank ratings are driven by strategic factors. In a sample of Asian banks rated by Fitch in 2004, Van Roy (2013¯nds further evidence that unsolicited bank ratings are lower than solicited ones and concludes that there is no support for selection bias. This evidence is compatible with two explanations: strategic behavior on the part of the CRA and selection of borrowers into di®erent solicitation categories.…”