Rights statement: This is the author’s version of a work that was accepted for publication in Pacific-Basin Finance Journal. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Pacific-Basin Finance Journal, 47, 2018 DOI: 10.1016/j.pacfin.2017.11.003
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Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Opportunistic behaviors of credit rating agencies and bond issuers
AU - Park, Gitae
AU - Lee, Ho-Young
N1 - This is the author’s version of a work that was accepted for publication in Pacific-Basin Finance Journal. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Pacific-Basin Finance Journal, 47, 2018 DOI: 10.1016/j.pacfin.2017.11.003
PY - 2018/2/1
Y1 - 2018/2/1
N2 - Using credit rating data from the three credit rating agencies (CRAs) in Korea, we examine whether bond issuers and CRAs engage in rating shopping and catering. First, we find that Korean bond issuers, who are required by law to receive two or more ratings, tend to fire or switch from CRAs that assign lower ratings than other CRAs. Second, when a bond issuer hires an additional CRA, the new CRA assigns a higher rating than incumbent CRAs. Lastly, we see that increased competition, which is measured by the number of CRAs hired by a given bond issuer, affects the likelihood of an upgrade occurring. Although CRAs often upgrade ratings when their rivals assign higher ratings, our findings show that higher competition further increases the likelihood that CRAs will upgrade ratings when there are rating disagreements. These results imply that bond issuers and CRAs engage in opportunistic behaviors that undermine the quality of credit ratings.
AB - Using credit rating data from the three credit rating agencies (CRAs) in Korea, we examine whether bond issuers and CRAs engage in rating shopping and catering. First, we find that Korean bond issuers, who are required by law to receive two or more ratings, tend to fire or switch from CRAs that assign lower ratings than other CRAs. Second, when a bond issuer hires an additional CRA, the new CRA assigns a higher rating than incumbent CRAs. Lastly, we see that increased competition, which is measured by the number of CRAs hired by a given bond issuer, affects the likelihood of an upgrade occurring. Although CRAs often upgrade ratings when their rivals assign higher ratings, our findings show that higher competition further increases the likelihood that CRAs will upgrade ratings when there are rating disagreements. These results imply that bond issuers and CRAs engage in opportunistic behaviors that undermine the quality of credit ratings.
KW - Rating shopping
KW - Rating catering
KW - Credit rating agency
KW - Competition
U2 - 10.1016/j.pacfin.2017.11.003
DO - 10.1016/j.pacfin.2017.11.003
M3 - Journal article
VL - 47
SP - 39
EP - 59
JO - Pacific-Basin Finance Journal
JF - Pacific-Basin Finance Journal
SN - 0927-538X
ER -