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Title:The economic function of credit rating agencies: what does the watchlist tell us? PDF Logo
Authors:Bannier, Christina E.
Hirsch, Christian
Issue Date:2009
Series/Report no.:Working paper series // Frankfurt School of Finance & Management 124
Abstract:Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract `a la Boot, Milbourn, and Schmeits (2006), inducing the companies on watch to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.
Subjects:Credit Rating Agencies
Credit Rating
Watchlist
Rating Review
Market Reaction
Event Study
JEL:G14
G29
G33
Persistent Identifier of the first edition:urn:nbn:de:101:1-2009070304
Document Type:Working Paper
Appears in Collections:Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management

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