Faculty of Economics and Business Administration Publications Database

The Adjustement of Credit Ratings in Advance of Defaults

Güttler, André
Volume: 31
Number: 3
Pages: 751 - 767
Month: March
ISSN-Print: 0378-4266
Link External Source: Online Version
Year: 2007
Keywords: Credit rating agencies; Credit rating biases; Leader-follower analysis
Abstract: This paper assesses biases in credit ratings and lead–lag relationships for near-to-default issuers with multiple ratings by Moody’s and S&P. Based on defaults from 1997 to 2004, we find evidence that Moody’s seems to adjust its ratings to increasing default risk in a timelier manner than S&P. Second, credit ratings by the two US-based agencies are not subject to any home preference. Third, given a downgrade (upgrade) by the first rating agency, subsequent downgrades (upgrades) by the second rating agency are of greater magnitude in the short term. Fourth, harsher rating changes by one agency are followed by harsher rating changes in the same direction by the second agency. Fifth, rating changes by the second rating agency are significantly more likely after downgrades than after upgrades by the first rating agency. Additionally, we find evidence for serial correlation in rating changes up to 90 days subsequent to the rating change of interest after controlling for rating changes by the second rating agency.