Are unsolicited credit ratings biased downward?

Pui Han, Winnie POON

Research output: Journal PublicationsJournal Article (refereed)peer-review

83 Citations (Scopus)

Abstract

There has been considerable controversy over unsolicited credit ratings in recent years. Some dissatisfied issuers allege that unsolicited ratings are biased downward in contrast to solicited ratings. This is the first empirical study to analyze the controversy using pooled time-series cross-sectional data of 265 firms in 15 countries from Standard and Poor's Ratings Services (SandP's) during the period of 1998-2000. The results demonstrate that unsolicited ratings are lower. On the other hand, I also find that those issuers who choose not to obtain rating services from SandP's have weaker financial profiles. Although the difference in ratings can be explained by this significant self-selection bias, results of the Japanese sub-sample indicate that unsolicited ratings are still lower than solicited ratings after controlling for differences in sovereign risk and key financial characteristics.
Original languageEnglish
Pages (from-to)593-614
Number of pages22
JournalJournal of Banking and Finance
Volume27
Issue number4
DOIs
Publication statusPublished - 1 Apr 2003

Bibliographical note

The author wishes to thank the financial analysts at Standard & Poor’s Ratings Services for providing ratings data and information on their rating methodology. The author would also like to thank Michael Firth, Koon Hung Chan, and an anonymous referee for their useful comments and constructive suggestions. Any remaining errors are mine.

Funding

The author is grateful for a research grant from the Research and Postgraduate Studies Committee of Lingnan University, Hong Kong.

Keywords

  • Ordered-probit model
  • Selectivity bias
  • Standard and Poor's ratings
  • Unsolicited credit ratings

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