The Journal of Finance · 2013 · 229 citations · 32 references
BusinessEconomicsFinanceCorporate FinanceFinancial EconomicsFinancial RegulationCredit Rating Agency RegulationCredit RatingsCredit RiskStructural Break AnalysisCredit Rating RegulationInvestment-grade BondsRating Agency BehaviorRating Agency RegulationRating TransitionsStructural Break TestsStructure Shifts
The study examines how corporate credit rating standards evolved from 1985 to 2007. Credit‑spread tests indicate that changes in rating standards are not solely driven by economic conditions. From 1985 to 2002, investment‑grade standards tightened while speculative‑grade standards loosened, but a 2002 structural shift made ratings more stringent, causing firms to lose an average of 1.5 notches between 2002 and 2007; tighter standards raise credit spreads and loose ratings correlate with higher default rates.
ABSTRACT I examine the time‐series variation in corporate credit rating standards from 1985 to 2007. A divergent pattern exists between investment‐grade and speculative‐grade rating standards from 1985 to 2002 as investment‐grade standards tighten and speculative‐grade loosen. In 2002, a structural shift occurs toward more stringent ratings. Holding characteristics constant, firms experience a drop of 1.5 notches in ratings due to tightened standards from 2002 to 2007. Credit spread tests suggest that the variation in standards is not completely due to changes in the economic climate. Rating standards affect credit spreads. Loose ratings are associated with higher default rates.
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Risk, Return, and Equilibrium: Empirical Tests
Eugene F. Fama, James D. MacBeth · Journal of Political Economy · 1973 · 15.1K citations