Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5089557 | Journal of Banking & Finance | 2013 | 17 Pages |
Abstract
Over the past decade there has been mixed evidence on the lead-lag relation between issuer-paid and investor-paid credit rating agencies. We investigate the lead-lag relationship for changes in bond ratings (BRs) and financial strength ratings (FSRs), for the US insurance industry, where FSRs impose market discipline. First, we find that changes in issuer-paid BRs are led by changes in investor-paid BRs, even over a period that issuer-paid agencies have improved their timeliness. Second, information flows in both directions between changes in issuer-paid BRs and FSRs. Third, issuer-paid FSRs are predictable by investor-paid BRs. Fourth, the lead effect of investor-paid downgrades is economically significant as it is associated with an unconditional, post-event, 30-day cumulative abnormal return of â4%. This return is a result of investor-paid downgrades in BRs, which predict more downgrades in the following 90Â days (same period return of â11%).
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Andreas Milidonis,