Split ratings and debt-signaling in bond markets: A note

Split ratings occur when national and international credit rating agencies assign different ratings to the same firm. Employing various proxies for asymmetric information and data from advanced and emerging bond markets, we review the evidence that split ratings are caused by asymmetric information between firms and credit rating agencies. We then apply the debt-signaling model to the split ratings problem, by testing for a systematic relationship between the debt-to-equity ratio and the magnitude of split ratings across countries. We finally test for the existence of an optimal debt-signal, which implies that higher debt-to-equity ratios will reduce the ratings split to an optimal minimum, after which accumulating more debt widens the ratings split. Our results suggest that firms in emerging markets can use the debt-signal up to a maximal point, after which it becomes inefficient.