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1 PRESENT AND FUTURE POSITION OF CREDIT RATING

Tiebreaker: Certication and Multiple Credit Ratings

Authors

Journal Name & Issue No

Prof Danuta Dziawgo,

Nicolaus Copernicus University
Folia Oeconomica Stetinensia. 2012,
Faculty of Economic Sciences and Management Issue 2, p160-174. 15p. 1 Chart.
Department of Accounting Gagarina 13a, 87100 Toru, Poland

DION BONGAERTS, K. J. MARTIJN CREMERS, and

WILLIAM N. GOETZMANN

THE JOURNAL OF FINANCE

VOL.
LXVII, NO. 1
FEBRUARY 2012

Objective

The article draws attention to the importance of credit rating in the financial market. It
analyses the possible scenarios for credit rating importance in the future context of the
financial market. It discusses the future architecture of the financial market and the safety
system in general

The paper discusses the economic role the credit agencies play
in the corporate bond market. In this paper bond issue credit
ratings, characteristics, and market prices have been used to
empirically evaluate the multiple ratings theories. Marginal,
additional credit ratings are more likely to occur because of, and
seem to matter primarily for, regulatory purposes. In this paper
three hypotheses:-information production, which posits that
the third rater adds value-relevant information, (ii) rating
shopping which proposes that issuers shop for a better rating
conditional on receiving a disappointing one, and (iii) regulatory
certication, which conjectures that a third agency plays the
role of tie breaker at the boundary of being classied as IG
(investment grade) versus HY (high yield). They do not seem to
provide signicant additional information related to credit
quality.

Sampling Method

Data Used

Qualitative Paper

CRA performance with respect to

default prediction on a 1-year horizon
have been used primarily for the
Credit Rating data of US Bonds
bonds that have been rated by the 3 from 2000 to 2008
rating agencies SA&P,Moody's and
Fitch

Statistical Tools Used

Variables used

Comparison and Induction Methods have been

used

Regression Analysis has been applied rating

scales,rating scale dummies,and rating
differences for the complete universe of bonds
Credit ratings given the
that are rated by all three CRAs.Hypothesis
CRAs
theory applied for testing the testing information
production,rating shopping and regulatory
certication

Findings

1.)Signicant differences exist across

multiple credit ratings of the same bond
issue at the same point in time
2.)Bond price data reveal how the market
regards a rating by the third agency
3.) CRAs provide useful information to the
market about credit risk. However, no
robust evidence that Fitch ratings provide
additional information incorporated in
bond prices, relative to the information
already contained in Moodys and S&P
ratings

Conclusions

The basic condition for credit rating existence is investors trust.

Without the trust of the investors, there will not be the existence of
CRAs. Also, inappropriate rating will lead to market share loss for the
agencies. Investors use the credit rating owing to the several
reasons like:- lack of alternatives for measuring creditability of
subjects and nancial instruments on such a wide scope, law
regulations creating demand for credit ratings, investors getting
accustomed to free grades as well as to free nancial auditor
statements. However, credit rating is not a perfect tool and the
circumstances in which it exists are not perfect. Investors have to
take into consideration the microeconomic and macroeconomic
variables. Therefore, credit rating is a tool to reduce investment risk,
and at the same time it generates additional risk particularly if the
system which is now functioning is supposed to be dismantled or
signicantly changed .

The mentioned ndings in addition to the other results, for example,

on the liquidity of the bonds, leads to conclusion that third(or
multiple) CRA arise in equilibrium as a tiebreaker that resolves a notrade region in a setting with information-sensitive and insensitive
investors and assets.

Done By Group Member name

Sudarshan Kumar Dey

Sudarshan Kumar Dey