[Research Seminar 2019.06.26] Do rating agencies deserve some credit? Evidence from transitory shocks to credit riskSpeaker : Junghoon Lee
We ﬁnd that Credit Rating Agencies (CRAs) see through transitory shocks to credit risk that stem from transitory shocks to equity prices, while market-based measures of credit risk do not. For a given stock return, CRAs are signiﬁcantly less likely to downgrade ﬁrms with transitory shocks than those with permanent shocks. However, credit default swap spreads and model-implied default probabilities do not distinguish between such shocks. These results explain why ratings are useful despite the availability of market-based estimates of credit risk: the ability to ignore transitory shocks is valuable because rating changes have real consequences for private contracts and access to capital.
Keywords: Credit Ratings, Mutual Funds, Institutional Investors, Financial Intermediation