Solicited Versus Unsolicited Ratings: The Role of Selection

Abstract

This paper analyzes the extent to which selection explains the observed discrepancy between solicited and unsolicited ratings. I propose a model of selection with truth telling rating agencies and borrowers with the ability to veto the revelation of the rating. The observed difference between the two categories of ratings in different sectors is in line with the prediction of the model. In the sovereign market there is a positive selection of borrowers into unsolicited ratings whereas other sectors have, on the contrary, lower unsolicited rating grades than those solicited.

Sovereign credit ratings during the COVID-19 pandemic

“…For example, bank and corporate ratings literature finds that issuers who do not pay for ratings on average receive lower assessment ( Bannier, Behr, & Guttler, 2010 ; Poon, 2003 ). The opposite is found in the sovereign ratings market ( Gibert, 2019 ). Following changes in sovereign solicitation disclosure rules, Klusak, Alsakka, and Gwilym (2017) find banks domiciled in sovereigns which switched their status to unsolicited rating receive a penalty in a form of lower ratings.…”