The question of whether ratings agencies convey new information to financial markets when they assign new ratings or change previous ratings has been debated for at least 40 years. In this study I first examine equity market, bond market and CDS market reactions to long and short term rating changes from S&P, Fitch and Moody's. I find that not all the credit rating changes affect the market but only those classified as unanticipated. Subsequently, I study whether the regulatory setting, in which the Credit Ratings Agencies work, can possibly affect the financial markets reactions. Lastly I show that the probability of a future rating change is severely affected by different factors proportional hazard rate models.

The need for regulation of the credit rating agencies (CRAs) arose due to their role in the subprime mortgage crisis. The CRAs awarded risky securities '3-A' investment grade status and then failed to downgrade them quickly enough when circumstances changed which led to investors suffering substantial losses. The causes identified by the regulators for the gatekeeper failure were conflicts of interest (as the issuers of these securities pay for the ratings); lack of competition (as the Big Three CRAs have dominated the market share); and lack of CRA regulation. The regulators, both in the US and EU, have tried to address these problems by introducing soft law self-regulation in accordance with the International Organisation of Securities Commissions Code and hard law statutory regulation such as that found in the "Reform Act" and "Dodd-Frank Act" in the US and similar provisions in the EU. This thesis examines these provisions in detail by using a doctrinal black-letter law method to assess the success of the regulators in redressing the problems identified. It also examines the US case law regulation relating to the legal liability of CRAs. The findings are that the US First Amendment protection, exclusion clauses and case law, all lack a deterrent effect on the actions of CRAs. As CRAs have escaped substantial damages, investors are left uncompensated for their losses. The thesis concludes that the issues of conflicts of interest and an anti-competitive environment persist. This thesis recommends the introduction of liability for the CRAs based on the Australian Bathurst case and which should be put in a statutory footing, including the requirements that are needed for making exclusion clauses effective. Rotation of CRAs for every three years would minimise the conflicts of interest. Regulators should require CRAs to purchase professional indemnity insurance, if available, to compensate investors.

The dominant role of credit ratings, along with the failure of important FIs, exacerbated the 2008 crisis and caused further damage to European economies, which highlighted the need for effective regulation to prevent a reoccurrence. This thesis investigates the effect of EU and US recent regulatory reforms of the rating industry on the quality of credit ratings of financial institutions (FIs), as well as the impact of the new EU financial regulatory initiatives on the performance of FIs. The first empirical Chapter focuses on the EU reforms of credit rating agencies (CRAs) and provides evidence supporting the presence of a conservative rating bias in the post regulatory period, as increased scrutiny, fines and liability increase the cost of over rating. CRAs exhibit an unwarranted decrease in EU FI ratings, evidenced by an increase in false warning and a fall in the informativeness of FI rating downgrades in the post regulatory period. A subsequent rise in stock market responses to rating upgrades is consistent with CRAs expending greater effort to ensure they are justified. The second empirical Chapter focuses on the US reforms of CRAs and reports no significant impact on FI ratings, rather each CRA has responded differently to the passage of the US Dodd-Frank Act (DFA). There is, however, a significant reduction in stock market reactions to FI credit rating signals, consistent with diminishing reliance on credit ratings by market participants in the US. The third empirical Chapter builds and estimates a dynamic model of FI behaviour using discrete choice dynamic programming (DCDP). The model is used to simulate and examine the impact of regulations, including EU reforms of CRAs, capital adequacy regulation (Basel III), and the bail-in regime, on FIs' behaviour in the real economy. The results show that the shift to increasingly conservative rating behaviour triggered by the CRA reforms has caused FIs to respond by manipulating their capital ratios and to reduce lending activities. The results also show that more stringent capital requirements stimulate FIs to hold more capital, reduce lending and reveal a positive influence in reducing bank insolvency rates, particularly during the crisis period. The introduction of a bail-in regime reveals similar results, but crucially stimulates the adoption of a stable equilibrium (unlike Basel III). This thesis highlights drawbacks with the current regulatory reforms of the EU and US FI rating industries and suggests potential solutions. The thesis also informs the policy debate surrounding the best way to regulate both CRAs and FIs and ensure that there is not a reoccurrence of the problems present in the 2008 financial crisis.

<p>This study aims to investigate the relationship between systematic risk and credit ratings. The systematic risk, frequently measured by beta, is an important consideration for both investors and corporations. Therefore it is interesting to examine if indications about the systematic risk could be gained by looking at credit ratings, especially on the Nordic market, where credit ratings are seemingly growing in importance. Consequently, the following research hypothesis is posed;<em> We intend to establish a relationship between market risk (Beta) and credit ratings for firms in the Nordic countries.</em></p><p><em> </em></p><p>In order to confirm or deny the research hypothesis, theories from peer reviewed databases were collected. These were divided into three sections; background theories, hypotheses about credit ratings and a literature review. The background theories consisted of two classical financial theories, the Capital Asset Pricing Model and the Efficient Market Hypothesis, which are the foundation upon which the research field have progressed. The hypotheses is specifically designed to explain the relationship between credit ratings and either systematic risk or stock price. The literature review contains information about studies which did not contribute to theory building, but produced results interesting in the research area.</p><p> </p><p>The actual sample in the thesis consisted of the 58 credit rated companies on the Nordic stock market. These companies were rated by Moody’s and/or Standard & Poor’s, the two largest credit rating agencies in the world. As a measure of the systematic risk, betas for each of the companies were calculated. To investigate the relationship between these variables a regression analysis was performed, as well as one sample T-test using the software SPSS.</p><p> </p><p>The result revealed a moderate relationship between beta and credit risk, a relationship which was not statistically significant on the five percent level. Our results suggest that credit ratings contain some information about companies’ systematic risk, a finding that might be useful for market participants.</p><p> </p>

This study aims to investigate the relationship between systematic risk and credit ratings. The systematic risk, frequently measured by beta, is an important consideration for both investors and corporations. Therefore it is interesting to examine if indications about the systematic risk could be gained by looking at credit ratings, especially on the Nordic market, where credit ratings are seemingly growing in importance. Consequently, the following research hypothesis is posed; We intend to establish a relationship between market risk (Beta) and credit ratings for firms in the Nordic countries. In order to confirm or deny the research hypothesis, theories from peer reviewed databases were collected. These were divided into three sections; background theories, hypotheses about credit ratings and a literature review. The background theories consisted of two classical financial theories, the Capital Asset Pricing Model and the Efficient Market Hypothesis, which are the foundation upon which the research field have progressed. The hypotheses is specifically designed to explain the relationship between credit ratings and either systematic risk or stock price. The literature review contains information about studies which did not contribute to theory building, but produced results interesting in the research area.   The actual sample in the thesis consisted of the 58 credit rated companies on the Nordic stock market. These companies were rated by Moody’s and/or Standard &amp; Poor’s, the two largest credit rating agencies in the world. As a measure of the systematic risk, betas for each of the companies were calculated. To investigate the relationship between these variables a regression analysis was performed, as well as one sample T-test using the software SPSS.   The result revealed a moderate relationship between beta and credit risk, a relationship which was not statistically significant on the five percent level. Our results suggest that credit ratings contain some information about companies’ systematic risk, a finding that might be useful for market participants.

The concept of asymmetric information is probably best described by medieval idiom to buy a pig in a poke or to buy a cat in a sack, and is a long standing issue in a market economy. A solution to this predicament, is thought to be an objective third party certifier who would provide true information for the market participants. Credit Rating Agencies (CRAs) by all definitions act as such certifiers within financial markets and have been on the public spotlight for the last years. In both cases, the US subprime mortgage crisis and the EU sovereign debt crisis, the agencies were charged for miss-information on quality of financial products, that led to financial losses for the investors or debtors. Theoretical deduction suggest that certain market reaction to CRA announcements may indicate  if markets perceive CRAs themselves as selling a cat in a sack to the investors. Event study approach is employed to investigate how do sovereign debt market react to CRA announcements. The results suggest that sovereign debt market reaction is more pronounced if three major CRAs issue clustered announcements, and more actively react to following announcements as opposed to the leading ones.

Our current understanding of credit rating agencies’ influence on national sovereignty relies on a dichotomised and highly antagonistic view of the relationship between states and the global economy. This perspective is locked into the discursive confines of the structuralist-sceptics debate within the field of international political economy. CRAs are said to either erode state sovereignty or represent a manifestation of it. By abandoning the state-market, public-private and national-global dichotomies embedded within this debate, and the zero-sum mentality they are predicated upon, this thesis offers an alternative – “transformationalist” – perspective to view the power of CRAs and their influence on national sovereignty. Defying traditional categorization, CRAs’ power is the result of a state-market, public-private confluence of interest and therefore has no determinative influence on national sovereignty. In the course of this analysis, a second assumption embedded within the study of CRAs’ influence is criticised: the fixation on the “big three” rating agencies (Moody’s, S&P and Fitch) and the neglect of the significance of the credit rating itself. Because the rating determination process is opaque, and the credit rating itself is a highly simplified expression of an intricately complex financial, economic and political reality, the causes of a sovereign rating change are often “up for debate”. Governments, within certain degrees of interpretation, are able to embed their own domestic political interests into the “causes” of a rating change, thereby co-opting and co-constructing the power and expertise of CRAs. This can, when successful, enhance governments’ internal sovereignty over domestic social forces and their external sovereignty as they “filter” the influence of a non-state actor. New Zealand’s interaction with the CRAs throughout 2008 to 2012 illustrates how this dynamic occurs and its limitations. The thesis seeks to highlight the diversity and heterogeneity involved in the processes of globalization in general, and CRAs’ influence in particular, and in doing so open up political space to consider possible forms of resistance.

abstract: While credit rating agencies use both forward-looking and historical information in evaluating a firm's credit risk, the role of forward-looking information in their rating decisions is not well understood. In this study, I examine the association between management earnings guidance news and future credit rating changes. While upward earnings guidance is not informative for credit rating changes, downward earnings guidance is significantly and positively associated with both the likelihood and speed of rating downgrades. In cross-sectional analyses, I find that downward guidance is especially informative in two important circumstances: (i) when a firm's current credit rating is overly optimistic compared to a model predicted rating, and (ii) when the relevance or reliability of alternative information sources is lower. In addition, I find that downward guidance is associated with lower future cash flows, as well as a higher volatility of future cash flows. Overall, the results are consistent with credit rating agencies incorporating voluntary bad news disclosures into their decisions about whether and when to downgrade a firm. / Dissertation/Thesis / Doctoral Dissertation Accountancy 2015

The thesis studies the factors which underpin the allocation of credit ratings by the two major credit rating agencies (CRAs) namely Moody’s and S&P. CRAs make regular headlines, and their rating’s judgements are closely followed and debated by the financial community. Indeed, criticism of these agencies emerged, both in this community and the popular press, following the 2007-2008 financial crisis. This thesis examines several aspects of the allocation of credit ratings by the major agencies, particularly in relation to (i) their revealed “loss function” preference structure, (ii) the determinants underpinning the allocation of credit ratings and (iii) the reasons determining the circumstances when the two agencies appear to differ in their opinions, and we witness a split credit rating allocation. The first essay empirically estimates the loss function preferences of two agencies by analyzing instances of split credit ratings assigned to corporate issuers. Our dataset utilises a time series of nineteen years (1991-2009) of historical credit ratings data from corporate issuers. The methodology consists of estimating rating judgment differences by deducting the rating implied probability of default from the estimated market implied probability of default. Then, utilising judgment differences, we adapt the GMM estimation following Elliott et al. (2005), to extract the loss function preferences of the two agencies. The estimated preferences show a higher degree of asymmetry in the case of Moody’s, and we find strong evidence of conservatism (relative to the market) in industry sectors other than financials and utilities. S&P exhibits loss function asymmetry in both the utility and financial sectors, whereas in other sectors we find strong evidence of symmetric preferences relative to those of the market. The second essay compares the impact of financial, governance and other variables (in an attempt to capture various subjective elements) in determining issuer credit ratings between the two major CRAs. Utilising a sample of 5192 firm-year observations from S&P400, S&P500 and S&P600 index constituent issuer firms, we employ an ordered probit model on a panel dataset spanning 1995 through 2009. The empirical results suggest that the agencies indeed differ on the level of importance they attach to each variable. We conclude that financial information remains the most significant factor in the attribution of credit ratings for both the agencies. We find no significant improvement in the predictive power of credit rating when we incorporate governance related variables. Our other factors show strong evidence of continuing stringent standards, reputational concerns, and differences in standards during economic crises by the two rating agencies. The third essay investigates the factors determining the allocation of different (split) credit ratings to the same firm by the two agencies. We use financial, governance and other factors in an attempt to capture various subjective elements to explain split credit ratings. The study uses a two-stage bivariate probit estimation method. We use a sample of 5238 firm-year observations from S&P 500, S&P 400, and S&P 600 index constituent firms. Our results indicate that a firm having greater size, favourable coverage and higher profitability are less likely to have a split. However, smaller firms with unfavourable coverage and lower profitability appear to be rated lower by Moody’s in comparison to S&P. Our findings suggest that the stage of the business cycle plays no significant role in deciding splits, but rating shopping and the introduction of regulation FD increase the likelihood of splits arising.

The thesis elaborates on the development of the rating at capital markets and its regulation in the context of the global financial crisis. The first part focuses on the definition of the rating, the kinds and types of grant, explanation of the symbols in the rating scale, the rating process and activities of credit ratings agencies. The second part compares the different development of credit rating industry in the United States of America and in the European Union. It also deals with the participation of credit rating agencies in the financial crisis. The last part is concerned with the Dodd -- Frank Act and Regulation 1060/2009 on credit rating agencies as two different measures granted after crises. The thesis analyzed also their impact on the credit rating industry.